The acquisition represents the largest deal completed by the search giant since its current CEO, Marissa Mayer, took over in July 2012.
It is understood that under the terms of the acquisition, Tumblr would continue to operate as an independent business, with its founder David Karp remaining in his role as head of the business.
Analysts say that by acquiring Tumblr, Yahoo will gain a larger social media presence and enhance its ability to attract younger audiences in its battle with internet rivals Google and Facebook.
Tumblr combines elements of blogging with social networking. According to its homepage, it now hosts 108 million blogs, with a total of 50.7 billion posts. It also has a significant presence on mobile devices.
Yahoo remains a giant in the internet world, with around 700 million visitors to its website every month. The majority of its revenues come from advertising, yet it has limited mobile reach and lags behind Google in the search engine rankings. It is hoped that the acquisition of Tumblr will be the first step along the road to reversing this.