Shares in Japanese technology giant Sony have slumped in Tokyo trade after Microsoft said it plans to buy mega games company Activision Blizzard.

The deal worth $68.7bn (£50.5bn), would be Microsoft's biggest ever buyout and the largest deal in gaming history.

It would see the US firm owning popular gaming franchises including Call of Duty, Warcraft and Overwatch.

The deal would be a major step for Microsoft's Xbox gaming brand in its battle against Sony's PlayStation.

It also comes a year after Microsoft bought another influential gaming company, Bethesda for $7.5bn.

Buying the troubled but successful Activision would turn Microsoft into the world's third-biggest gaming company by revenue, behind China's Tencent and Sony, marking a major shift for the industry.

Microsoft said the Activision-Blizzard deal would help it grow its gaming business across mobile, PC and consoles as well as providing the building blocks for the metaverse.

The purchase of the Call of Duty maker comes as Microsoft is also aggressively expanding its Game Pass subscription service.

"We're investing deeply in world-class content, community and the cloud to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive and accessible to all," Microsoft's chief executive Satya Nadella said in a statement.

In the battle for popularity with gamers, Sony's PlayStation 5 is widely seen as having the lead over Microsoft's fourth generation Xbox models.

In recent years, Sony has strengthened its network of in-house games studios and delivered a string of exclusive hits including in its Spider-man franchise, which has left its US rival playing catch-up.

The Japanese firm is also a pioneer in virtual reality and this month teased some details its next generation headset.

However, it faces tough competition in that area from non-traditional rivals such as Facebook owner Meta Platforms, which is investing heavily in its metaverse offering.

Sony Group's shares closed 12.8% lower in Tokyo on Wednesday, which helped to pull down the benchmark Nikkei 225 index by 2.8%.