Microsoft, which failed several times to acquire search company Yahoo, said the new European search technology center would have hubs in Paris, London and Munich.
It added its budget for research and development in Europe, which currently stands at $600 million a year, would increase.
"We are the challenger, not the leader, in search, but we believe strongly that search is in its infancy and there is so much room for innovation," Chief Executive Steve Ballmer told a news conference in Paris.
"For companies like Microsoft search is the key for unlocking huge new opportunities in advertising."
Ballmer declined to say how much the group would invest in the research centers announced today, but said that "over the next few years we expect to employ several hundred people, software developers, in these centers in Europe."
Speaking alongside Ballmer, French Economy Minister Christine Lagarde said the new French facility, to be based in Issy-les-Moulineaux, near Paris, would be up and running by around March 2009.
Lagarde added that Microsoft would benefit from a tax credit scheme aimed at encouraging R&D investment. For every 100 euros invested by the U.S. group, it would get 30 euros back from the French state.
Ballmer said the investments announced on Thursday would bring the group's research presence in Europe to 2,000 engineers, taking the top spot in regions outside the United States, a little ahead of China and with India at number three.
"In many ways it's an interesting time, though, to be talking about investment at all. I was talking to the minister a little bit about the current economic uncertainties and investing in anything today can, I think, be a bit of a hard sell," Ballmer said.
Microsoft has about 2 percent of the European online search market, according to Web research firm ComScore, compared with Google's 79 percent.
The U.S. group recently bought UK mapping specialist Multimap, Germany-based price comparison site Ciao and Norwegian enterprise search company FAST as it tries to establish a niche in particular search areas used for such purposes as shopping.
In an interview with Reuters, Jean-Philippe Courtois, President of Microsoft International--operations outside the U.S. and Canada--said the $2 billion worth of acquisitions of Internet-based companies in Europe over the past 12 months were complete or nearing completion.
"We keep looking at a lot of great start-up companies in Europe and other parts of the world and I am sure there will be some more to come in the next 12 months," Courtois said.