The deal raises the prospect of Bill Gates, Microsoft's founder, becoming the catalyst for a further, final round of consolidation within UK cable industry which may result in the emergence of a single player big enough to square up to both BT and Rupert Murdoch.
Telewest, whose shares soared 31.5p to 287p on the news, was already in talks with Cable & Wireless before yesterday's deal. Microsoft recently bought a $500m stake in NTL, Britain's other major cable operator.
The purchase of the Telewest stake is the biggest corporate move to date by Bill Gates in the UK. It comes against the backdrop of growing pressure on the cable operators in the UK to respond to Mr Murdoch's aggressive bid to win the lion's share of the UK market for digital television.
The main thrust of yesterday's deal between Microsoft and AT&T is an agreement extending Microsoft's access to the set-top boxes being installed by AT&T in millions of US homes as part of plans to provide full broadband TV, Internet and voice services throughout the United States.
The move which follows AT&T's takeover of cable operator MediaOne for $57bn earlier this week is in return for Microsoft bankrolling AT&T by subscribing for $5bn new warrants and preferred shares. If exercised these will give Microsoft a 3 per cent stake in AT&T. Microsoft's backing was instrumental in AT&T seeing off a rival bid for MediaOne from Comcast, another US cable operator.
Yesterday's deal is the latest attempt by Microsoft to diversify into media and communications businesses, reflecting Bill Gates' conviction that the technology underpinning the computer software and telecommunications industries will increasingly converge.
He believes that television will gradually supersede the personal computer as the main access point for Internet related services in the majority of homes worldwide.
Hailing the alliance with AT&T yesterday, Mr Gates said: "Our agreement today represents an important step in Microsoft's vision of making the web lifestyle a reality. Working with AT&T, a leader in the delivery of cable and telephony technologies, we will expand access to an even richer Internet and television experience for millions of people."
The deal is equally significant for AT&T, which under the leadership of chairman and chief executive officer Michael Armstrong, has successfully reinvented itself as a major force in the American cable industry. After the MediaOne deal, AT&T will be the US's largest cable television operator with 16 million customers.
However, the deal will almost certainly raise some regulatory concerns, although the company went out of its way to stress that the agreement, which extends AT&T's existing commitment to install Microsoft's Windows CE software, is by no means exclusive.
Microsoft is awaiting the outcome of a court battle with the US Justice Department over allegations that its position in the PC software market breaches US anti-trust rules.