As part of the arrangement, Microsoft will provide the Australian federal government with a monthly security bulletin and in return Microsoft will have closer contact with government agencies to learn how Microsoft products are being used and operating.
The alliance, dubbed the Security Cooperation Program (SCP), is the first whole-of-government agreement for Microsoft.
Announcing the agreement, Attorney General Phillip Ruddock said the SCP is one way to remain ahead of hackers and criminals "who seek to exploit information technology systems for their own benefit or to inflict harm on our community".
"The SCP would help defend government systems against terrorists who may be planning to break into computer systems to shut down markets, or disrupt water or electricity services."
All federal government agencies are immediately part of the agreement. State and territory governments can also sign up to the SCP.
Hydrasight analyst Michael Warrilow said if the arrangement involves anything more than exchanging information, he has serious concerns. Warrilow said the way it looks at the moment is just a feel-good approach with very little actual merit.
"The Attorney General has already invested in AusCert for Australia and the region as well as the critical infrastructure group whereas the government overall has invested in the Defense Signals Directorate (DSD)," Warrilow said.
"In my opinion these agencies represent a far better means of protecting the government and Australian society."