The service will put WH Smith in direct competition with Dixons, the electrical retailer, in the battle for Internet users. Freeserve, the free service owned by Dixons, has signed up more than 1.5 million users since it was launched last year.
Details of the service will not be announced until next month, but the news boosted WH Smith shares, which jumped 67.5p to 657.5p, adding pounds 167m to the group's market capitalisation. Shares in Dixons fell by 113p to 1,239p.
Richard Handover, WH Smith chief executive, said the company was planning to provice a fully-fledged Web portal - a doorway Internet users will pass through before visiting other parts of the Net - offering education, entertainment and electronic commerce.
WH Smith is likely to sign up users for the service by providing the necessary software on CD-Roms in its stores and free on the website. The Internet service, which will only require users to pay for local calls, will be provided by BT.
The group had already established itself as a player in the Net market by buying The Internet Bookshop and Helicon, a supplier of online information.
Since Freeserve was launched several other companies, including Tesco, Virgin and BT, have followed its lead. They were joined yesterday by Yahoo!, the US portal group, which linked with HMV and Waterstones to offer a service.
However, analysts said the proliferation of free services meant the battleground was likely to shift from signing new customers to building sustainable traffic flows to websites.
Meanwhile Flextech, the television group behind channels such as Bravo and Challenge TV, pinned its future on the Net with plans to invest pounds 20m in its interactive division.
Adam Singer, Flextech's chairman and chief executive, said the Internet resembled the cable industry in its fledgling days of the late 1980s.
Flextech reported a pre-tax loss before exceptionals of pounds 2.95m for the year to December, compared to a profit of pounds 751,000 last year. The company said its core channels made an operating profit of pounds 17m, but its share of the losses of UKTV, its joint venture with the BBC, almost doubled to pounds 12.2m.