The service will be offered through a planned Kmart e-commerce site dubbed BlueLight.com and will be powered by Spinway, a free ISP with funding from Masayoshi Son's Softbank and Seagate founder Al Shugart, the sources said.
Yahoo will become the interface for the co-branded service on BlueLight.com, sources confirmed.
Yahoo declined to comment on the deal. Kmart was not immediately available for comment.
A Spinway spokeswoman would not confirm or deny the company's involvement in the BlueLight.com venture.
A number of signs point to Spinway's involvement, however.
The header on BlueLight.com's Web site reads "BlueLight.com @ spinway," and the site has one text phrase posted that reads: "Something exciting and fun is on the way..." A search on Network Solutions' Whois domain directory shows the BlueLight.com name registered to Softbank.
A Kmart representative said the company will hold a press conference tomorrow morning in New York at the Waldorf Astoria Hotel to make "an announcement in regards to their e-commerce strategy."
A Spinway representative said the company also will hold a press conference tomorrow morning at the Waldorf Astoria to make an undisclosed announcement. In addition, Spinway is holding a launch party tomorrow evening in San Francisco, according to an email invitation sent to CNET News.com.
News of the expected deal comes as more Internet heavyweights are turning to offline retail chains to add mainstream consumers to their services. Microsoft recently inked a deal with RadioShack to market its services. America Online also is expected to announce a similar cross-marketing deal with Wal-Mart, according to Salomon Smith Barney analyst Richard Church.
The trend toward striking deals with brick-and-mortar stores could indicate that Internet giants are looking for ways to add more mainstream consumers to their services. Internet growth in recent months has slowed, according to reports by Media Metrix, leaving some analysts to wonder whether the phenomenon will hurt Internet stocks.
Similar to free ISP 1stUp.com, which powers AltaVista's free Internet service, Spinway requires users to download an interface that feeds advertisements to them. By doing so, the company can track user behavior and habits. With this information, the free ISP can sell spots on its interface to advertisers looking to target their product messages.
For Yahoo, the co-branded Internet access service could serve as another vehicle through which to build its audience. And the deal could further extend Kmart's Internet efforts by allowing it to market a well-known Internet brand.
The deal was first reported by the Wall Street Journal.