Yahoo says "state-sponsored" hackers stole information from about 500 million users in what appears to be the largest publicly disclosed cyber-breach in history.
The breach included swathes of personal information, including names and emails, as well as “unencrypted security questions and answers”.
The hack took place in 2014 but has only now been made public.
The FBI has confirmed it is investigating the claims.
The data taken includes names, email addresses, telephone numbers, dates of birth and encrypted passwords, but not credit card data, Yahoo said.
The company said the information was "stolen by what we believe is a state-sponsored actor" but did not say which country it held responsible.
News of a possible major attack on the technology firm emerged in August when a hacker known as "Peace" was apparently attempting to sell information on 200 million Yahoo accounts.
On Thursday, Yahoo confirmed the breach was far bigger than first thought.
Yahoo is recommending all users should change their passwords if they have not done so since 2014.
Questions for Yahoo - Dave Lee, BBC North America technology reporter, San Francisco
The nature of the information stolen feels somewhat run-of-the-mill - no payment info, and passwords were encrypted. Good. But the chain of events leading up to this unprecedented announcement gives rise to some incredibly pressing questions for Yahoo.Why did it take so long to confirm the hack and its scale? Why did it take so long to tell users and prompt them to protect themselves?
State-sponsored attacks are typically for political, not financial gain. So why were details reportedly being sold online? What evidence is there that it was state-sponsored?
Verizon, which has agreed to buy Yahoo, said it had not been told until a couple of days ago - why not? And why is Marissa Mayer, a chief executive who has presided over bad deals and now the biggest breach in internet history, still in charge?
In July, Yahoo was sold to US telecoms giant Verizon for $4.8bn (£3.7bn).
Verizon told the BBC it had learned of the hack "within the last two days" and said it had "limited information".
It added: "Until then, we are not in position to further comment."
Yahoo said in a statement: "Online intrusions and thefts by state-sponsored actors have become increasingly common across the technology industry."
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