UPDATE 1-Time Warner's AOL to buy ad firm Tacoda

(Recasts with company confirmation)

NEW YORK, July 24 (Reuters) - Time Warner Inc.'s (TWX.N: Quote, Profile, Research, Stock Buzz) AOL unit said on Tuesday it has agreed to buy Tacoda, an online advertising company that uses behavioral targeting techniques to track Web user habits.

The deal is the latest acquisition by AOL to bolster its online advertising tools following its decision to move away from its Internet access business and instead offer consumers free services supported by ads.

Financial terms of the deal were not disclosed by the companies. A person familiar with the situation said AOL was paying $275 million in cash for Tacoda.

Tacoda's technology allows brand advertisers to target messages to specific audience segments based on the kinds of sites they have visited on the Web.

The capability aims to help Web publishers capture one of the next big waves of growth for Internet advertising, which is drawing marketing dollars from other media outlets.

Industry tracking firm eMarketer has forecast the market for behaviorally targeted advertising will increase to $3.8 billion in 2011 from $350 million last year.

New York-based Tacoda employs about 100 people.

Web media and technology companies have created a lively auction for online ad firms, including Google Inc's (GOOG.O: Quote, Profile, Research, Stock Buzz) proposed purchase of DoubleClick for $3.1 billion and Microsoft Corp's (MSFT.O: Quote, Profile, Research, Stock Buzz) planned acquisition of aQuantive AQNT.O for $6 billion.

AOL has made smaller purchases of ad firms, including mobile ad network Third Screen Media and online video ad company Lightingcast. (Reporting by Nick Zieminski and Michele Gershberg)