The services are expected to be available in the second half of 2016 for customers in the European Union and countries that are members of the European Free Trade Association (EFTA).
The measure is designed to ensure that clients' data remains in Germany, Microsoft chief Satya Nadella said in Berlin.
Microsoft's cloud offerings, including Azure, Office 365 and Dynamics CRM Online, will be delivered from two new data center regions in Magdeburg and Frankfurt.
Telekom's sister company T-Systems will act as a trustee over the data.
The measure is aimed at European businesses, mainly in the financial and health sectors, which have been concerned over the safety of their data after former NSA contractor Edward Snowden revealed in 2013 a widespread U.S. surveillance program.
Microsoft has put more focus on its cloud business, which Nadella sees as central to the company's future.
BITKOM, a German IT trade association that represents more than 2,200 international companies operating in the digital sector estimates that 44 percent of all businesses in Germany used cloud services last year.
Oracle, Amazon, Salesforce and SAP also offer cloud services.
Culled from Yahoo News.
(Reporting by Nadine Schimroszik; Writing by Joseph Nasr, editing by David Evans)
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