The market is growing for premium spirits, analysts say

It will pay Ketel One owners, the Nolet family, $900m (�459m) for a 50% stake in the new firm, which will "sell, market and distribute" the brand.

The purchase follows Diageo boss Paul Walsh's decision to rule the firm out of the race to buy the maker of Swedish vodka Absolut, worth a possible $6bn.

Ketel One would join Smirnoff and Guinness in Diageo's growing portfolio.

The deal is expected to be complete by 31 March, subject to regulatory approval and other conditions.

This transaction is strategically important for Diageo Paul Walsh, Diageo chief executive

It will see the Nolet family retain ownership of the brand and of the distillery in Holland, where they have been distilling since 1691.

Analysts observed that Diageo, the biggest alcoholic drinks company in the world, has been keen to beef up its portfolio of spirits amid falling Guinness sales in Western Europe.

'Strategic fit'

"This transaction is strategically important for Diageo, giving us an interest in an outstanding high quality brand and fantastic potential for global growth in the super-premium vodka segment," Mr Walsh said.

The Ketel One brand was a better strategic fit and had greater growth potential than Absolut, he said.

Demand for Guinness is on the rise in Africa, but falling in Europe

The iconic vodka label was put up for sale last December by the Swedish government, which owns its parent company Vin & Sprit (V&S) as part of a huge privatisation push.

Diageo's exit leaves France's Pernod Ricard, US group Fortune and Bermuda-based Bacardi slugging it out to win control of Absolut, one of the biggest selling vodka brands in the world.