The US firm, which has already ploughed billions into ChatGPT maker OpenAI, called Mistral "an innovator and trailblazer" in a statement on Monday.
Microsoft said it had sealed a "multi-year partnership" that would allow Mistral to use its platforms including Azure AI, which enables businesses to build apps using AI.
The deal comes just weeks after US authorities began to investigate whether Microsoft's reported $13 billion investment in OpenAI broke antitrust laws.
The deal is one of three partnerships between big tech companies and AI startups being scrutinised by the Federal Trade Commission (FTC).
The firm has denied any wrongdoing and has not stopped its forays into a sector that has so far been defined in the public's imagination by OpenAI.
The Silicon Valley company has developed software that enables users to generate text, pictures and video from simple requests -- with results generally regarded as superior to its competitors.
- 'Le Chat' -
Mistral, formed last year by ex-Google and Meta researchers, is a rare European player in a field dominated by US firms.
The French company, which has already raised almost 500 million euros ($540 million), confirmed the partnership with Microsoft on Monday.
"We are thrilled to embark on this partnership with Microsoft," said Mistral boss Arthur Mensch.
He said it would help propel his company's products to customers across the world.
Some investors valued Mistral at more than $2.0 billion in December, leading to frenzied speculation about it becoming a future European tech champion.
The firm, which has so far focused on back-end development for business clients, announced its first chatbot on Monday, which it dubbed "Le Chat".
"Le Chat is natively multilingual and offers a pedagogical and fun way to explore Mistral AI's technology," the firm said in a statement in English.
The company said it would let some of its customers test the bot before releasing it more widely.
Mistral also announced upgrades to its existing language models -- the term used by AI firms to refer to the programs they develop with the help of public data.
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