The company said an additional 500 people will be laid off from iPlanet, AOL's enterprise software alliance with Sun Microsystems. AOL employs 16,000 people.
AOL Time Warner will take a $100 million to $125 million charge in the third quarter for costs relating to the restructuring.
The restructuring, which was widely expected, marks an ongoing attempt by AOL Time Warner to streamline its operations in the face of a souring economy. The company has set aggressive financial goals for the year of $40 billion in revenue and $10 billion in earnings before interest, taxation, depreciation and amortization (EBITDA).
Last quarter, the company missed its revenue estimates, leading some on Wall Street to question whether AOL Time Warner would make its financial goals.
Some analysts applauded Tuesday's decision to cut staff at its Internet unit.
"It's a smart move," John Corcoran, Internet analyst at CIBC World Markets, said of the layoffs. "What they're doing is tightening the belt in a challenging macroeconomic environment."
Corcoran said that since the company generates 25 percent of its revenue from advertising, it is struggling to increase that revenue each quarter.
"America Online and cable are really pulling most of the weight here," Corcoran said. "This is not as though this thing is broken and they're trying to resurrect it."
Tuesday's announcement marks the second time AOL Time Warner has cut staff in its Internet unit since its merger. Shortly after that deal closed, the company slashed about 2,400 jobs. Divisions affected in that round included America Online, CNN, Time Inc., Warner Bros. Online, Warner Music Group and New Line Cinema.
The latest layoffs are accompanied by an overall executive restructuring within the AOL division:
Jonathan Sacks was named president of the AOL Interactive Services Group, which will oversee the AOL online service and its Digital City local Web guide.
Former Netscape head Jim Bankoff will become president of AOL Web Properties Group and oversee operations for Netscape, CompuServe, Moviefone, MapQuest, ICQ and AOL Instant Messenger.
As previously reported, Robert Friedman will head sales and marketing as president of the Interactive Marketing Group.
Don Davis will become president of the Vertical Markets Group, which will oversee advertising and commerce for areas such as music, personal finance and travel, among others.
Former CompuServe President Audrey Weil will become president of AOL Broadband Group to grow its AOL cable, DSL and satellite services.
Lisa Hook will head AOL Anywhere, which offers AOL services outside of the PC.
The company added that it plans to share more resources, such as technology, business affairs, marketing and communications, across many divisions to further cut costs.