Microsoft and Hyundai said the first product under the partnership would be a voice-controlled system linking mobile devices to car stereo systems.
Later versions are expected to include multimedia and navigation-related features, the companies said.
The deal will add a new competitor to Ford Motor's Sync system, which allows a driver to use voice commands to control a system linking the car's audio system with a mobile phone and the iPod from Apple.
In a twist that promises to make the car-based system similar to the desktop computer market, the Hyundai data and entertainment device will be able to take on new features with software updates, the companies said.
The product deal marks a win for Microsoft, which has been working to open up the driver's seat as a new market for its software beyond its dominance in the office and living room.
The market for car-based information and data systems is expected to grow sharply in coming years, and automakers such as BMW and Chrysler have projects in the works to bring regular Internet access to vehicles.
For its part, Hyundai, and its affiliate brand Kia Motors, have struggled to shake a reputation for building vehicles in the U.S. market that compete more on price than styling or technology.
Sync, which Ford developed in partnership with Microsoft, has been a surprise hit for Ford. It was introduced first on Ford's entry-level Focus sedan and has been credited with helping to lift sales of that car and to help the struggling U.S. carmaker connect with younger car buyers.
In addition to the Ford deal, Microsoft Auto also provides the software system used in Fiat vehicles sold in Europe and Latin America.
Microsoft and Hyundai were set to sign the partnership agreement at a ceremony in Seoul attended by Bill Gates, Microsoft chairman, and Hyundai Kia Automotive Group Chairman Chung Mong-koo.
Financial terms of the licensing agreement between the two companies were not disclosed.