The partnership between Nokia Corp. (NOK) and Microsoft Corp. (MSFT) illustrates the different directions that each technology giant is headed towards in the mobile industry.

Nokia, armed with Office programs likely to attract business users, intends to cement its leadership position in smartphones, which has faltered amid intense competition from rivals such as Research in Motion Ltd. (RIMM).

For Microsoft, the partnership is a tacit admission that its own mobile operating system may be in retreat, industry observers say.

"They're admitting that Windows Mobile as a platform is never going to get the appeal that Microsoft wanted," said Carolina Milanesi, an analyst at research firm Gartner Inc.

Steven Elop, head of the business division for the Redmond, Wash., software maker, denied the claim and touted the upcoming version of Windows Mobile slated for later this year.

But it's clear the platform is getting squeezed by newer, flashier software. Motorola Inc. (MOT) has abandoned Windows Mobile this year as it focuses on Android, a rival operating system freely distributed by Google Inc. (GOOG). HTC Corp. (2498.TW), Microsoft's staunchest ally in the mobile world, has been at the forefront of creating Android phones.

Microsoft's presence in the smartphone market is in retreat. In the second quarter, it controlled 9.3% of the market share for smartphones, overshadowed by Symbian, RIM and Apple, according to Gartner.

Microsoft's best bet to remain relevant was to strike a licensing deal with Nokia, Milanesi said. The broad base of Symbian users far outstrip the number of Windows Mobile phones outfitted with Office capabilities.

Nokia has likewise seen its position fall, but it remains the leader with more than double the share of the next competitor, RIM. Still, RIM, Apple and HTC are making steady gains in smartphones, which are considered the most lucrative products in the handset industry.

Nokia plans to use Microsoft's Office programs and other applications to lure business users away from their Blackberrys. The Finnish company wasn't shy about who it was targeting.

"If any company should be worried about this - it's about creating a formidable challenger to RIM," said Kai Oistama, executive vice president for devices.

RIM wasn't immediately available for a comment. An Apple spokeswoman declined to comment for the story.

Nokia stuck a deal last year to bring Microsoft's Exchange e-mail access to its Symbian phones. Both Microsoft and Nokia said that the partnership would go beyond bring Office programs to the phones.

"It's a broader relationship than Office," Elop said.

The partnership isn't without its critics. Roger Entner, an analyst at Nielsen Co., noted that deals between large companies generally don't work because of conflicting agendas.

"Here you have two very large organization working together and you have to make decisions that are best for both of them," Entner said. "But companies aren't always good at being altruistic."

Only if the two companies "get really serious" will they have a chance to take on RIM, he added.

Microsoft's software will start showing up in Nokia's E-series smartphones next year, with plans to move on to more phones down the line.

Nokia shares recently rose 1.4% to $13.26. Microsoft rose 2.1% to $23.62.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

  (Jessica Hodgson contributed to this story.)