Adds details on the deal, background throughout

Feb 25 (Reuters) - Baidu 9888.HK said on Tuesday it has bought JOYY's YY.O China live-streaming business for about $2.1 billion, reviving a deal that fell through a year ago, as the search giant doubles down on the fast-growing digital video market.

The companies had agreed upon a $3.6 billion deal in 2020 at the height of the pandemic, when video-streaming services benefited from a surge in usage by people stuck at home. But lack of regulatory approvals sank the acquisition in January last year.

Now, Baidu has finally bought the business, known as YY Live, after Beijing softened its stance towards the tech sector following a regulatory crackdown four years ago.

The company did not disclose what sparked the reversal, but they had been in talks to reach a resolution since the deal collapsed. JOYY had received about $1.86 billion in February 2021 as part of the original agreement and an additional cash of about $240 million on Tuesday.

The acquisition will help Baidu diversify its revenue and compete better with online entertainment rivals such as Douyin and TikTok-parent ByteDance, which have grown to dominate the space after making an early start.

U.S.-listed shares of Baidu rose 1% in premarket trading, while JOYY jumped 6%.

IQIYI IQ.O, a U.S.-listed subsidiary of the tech giant, is seen as China's answer to Netflix. But strong competition from startups and heavyweights, including Tencent 0700.HK and Alibaba's Youku 9988.HK, have weighed on its growth in recent years, with its shares falling nearly 60% last year.

The move could also aid Baidu's push to expand in AI and cloud as it would unlock $1.6 billion that the company had put in escrow accounts as part of the 2020 agreement.

Those funds can be used for equipment essential to competing in an AI industry increasingly under the spotlight after the stunning success of low-cost models from DeepSeek.

(Reporting by Aditya Soni and Harshita Mary Varghese in Bengaluru; Editing by Shilpi Majumdar)

((HarshitaMary.Varghese@thomsonreuters.com))