The software giant, which tried and failed to buy Yahoo earlier this year, is looking to revamp its search-ad strategy to better compete with the industry juggernaut, Google.
Microsoft also has decided it does not want to buy Yahoo any more, although it has left open the possibility of a search deal with the company. Lu, who was responsible for development of the Web search and monetization platforms at Yahoo, left the company in August after 10 years.
He will begin work at Microsoft in January and report directly to Chief Executive Steve Ballmer.
Last month, Microsoft hired Sean Suchter, another former Yahoo search executive.
Microsoft also said Brian McAndrews, the former CEO of aQuantive, which the company acquired last year for $6 billion, is leaving the company. He was senior vice president of the advertiser and publisher solutions group, which will be overseen by Lu in his new role.
Shares of Redmond, Washington-based Microsoft closed at $19.11, down 76 cents or 3.8 percent, while shares of Sunnyvale, California-based Yahoo closed down 45 cents or 3.9 percent at $11.05.
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