The planned acquisition follows Baidu's announcement in May that it would buy the online video business of PPS Net TV for $370 million. Chinese rivals Tencent and Alibaba Group are also investing to stimulate revenue growth, with Alibaba this year buying stakes in Sina Corp's social-networking website Weibo and in navigation and maps firm AutoNavi.
Baidu is also looking to fend off Qihoo 360, which has been eating away at its search market share since breaking onto the scene last year and which also has a competitive app store.
"Baidu is pretty strong in the PC Internet space and 91 Wireless will serve as an important gateway into the mobile Internet sector, where it is still pretty weak right now," said Xue Yongfeng, an analyst at research firm Analysys International in Beijing.
Baidu said it has agreed to buy a 57.4 percent stake in 91 Wireless, one of China's earliest app stores, from NetDragon Websoft Inc for $1.09 billion, and the remainder from other shareholders.
"Mobile app stores are an increasingly important entry point to the mobile Internet and are therefore of great strategic interest to Baidu," Baidu spokesman Kaiser Kuo told Reuters.
China's mobile Internet market is expected to double to about 300 billion yuan (31.6 billion pounds) in 2014 from 150 billion yuan in 2012, with the number of active mobile Internet users rising to 749 million from 521 million during the same period, according to Analysys International.
Shares of NetDragon fell as much as 23 percent after the announcement as the online gaming company was giving up one of its key assets, analysts said.
NetDragon also said that it would scrap the planned spinoff and listing of 91 Wireless on Hong Kong's secondary Growth Enterprise Market if the acquisition is finalised.
NetDragon said it would continue to focus on the development and operation of online and mobile games. In 2012 it had a profit of 39 million yuan ($6.3 million), one quarter of which came from its mobile Internet business, according to Thomson Reuters Eikon data.
An analyst at Societe Generale estimated that Baidu could draw $1.1 billion of internal cash, requiring it to raise $800 million via debt or equity foe the deal.
"We view the acquisition as credit positive as the acquisition of the mobile app developer will diversify Baidu's revenue stream and increase market share in the mobile Internet business. That offsets the acquisition pace we view as aggressive," the analyst said.
The analyst did not expect the acquisition to impact Baidu's A3/A rating but did express concern that the "acquisition pace should alarm investors on the company's aggressive growth strategy, which comes with execution risk and rising leverage, which could threaten the ratings in a longer term."
Baidu's bonds due 2022 were trading at 192/185 basis points over U.S. Treasuries after widening out to as much as 200 bps over following the announcement.
(Reporting by Lee Chyen Yee and Twinnie Siu; Additional reporting by Umesh Desai; Editing by Chris Gallagher)
By Lee Chyen Yee and Paul Carsten