The deal values Level One at $48.75 a share, an 80 per cent premium to yesterday's closing price. The transaction is expected to be completed by the end of the second quarter.
Intel is pushing into the fast-growing market for chips used in networking equipment, and Level One makes chips with built-in communications features that are used by most large network equipment makers to reduce the cost of their kit.
Buying Level One gives Intel products for a part of the chip industry that is growing faster than its traditional microprocessor market.
"This plays into everything Intel is trying to do," one analyst said.
"We're continuing to look for other acquisition candidates," said Intel chief executive Craig Barrett. "We are deadly serious about our networking- communications group."
The purchase of Level One, based in Sacramento, California, comes after Intel agreed to buy the Internet equipment maker, Shiva, for $185m in October.
Intel currently faces anti-trust charges by the US government, which will be heard in a trial starting next week. The Federal Trade Commission outlined its view of Intel's rise in a 50-page filing, arguing that the company had abused monopoly power and bullied three of its customers to maintain a stranglehold on its market.