(Reuters) - Intel shares jumped 7% before the bell on Tuesday, as a chip-making deal with Amazon's cloud business provided a major stamp of approval for its struggling contract manufacturing business.

The chipmaker will build custom AI chips for Amazon Web Services (AWS) as part of the multibillion-dollar deal. The move expands a years-long tie-up between the companies under which Intel designs several chips used in Amazon's datacenters.

"The deal provides Intel with some credibility as it looks to gain traction with new external customers. In addition, it will help Intel sell itself as a supplier of custom AI silicon chips" said Angelo Zino, senior equity analyst at CFRA Research.

Intel's stock has plunged nearly 60% this year and has lagged chip firms, including Nvidia and TSMC, as it missed out on an AI-driven boom in chip demand.

The company has been trying to regain the manufacturing edge it lost to TSMC by building out its foundry unit, which has been the centerpiece of CEO Pat Gelsinger's turnaround strategy.

AWS is among the first major customers Intel has announced a definitive deal with. It had said in February Microsoft would use its services to manufacture a custom computing chip.

But "meaningful" revenue from the capital-intensive foundry unit is not expected until 2027, even as expensive investments sap cash flow and draw investor ire.

To ease the pressure, Intel said it would pause chip factory projects in Poland and Germany by about two years, raising doubts about the nearly 10 billion euros ($11.14 billion) in subsidies from Germany for its two plants in the country.

"The move ... should help to boost cash flow, even if the focus on US-based fabs is unlikely to go down well in the EU. It will no doubt gain plaudits in Washington though and help Intel preserve important relationships," Russ Mould, investment director at AJ Bell, said.

($1 = 0.8978 euros)

(Reporting by Deborah Sophia and Arsheeya Bajwa in Bengaluru; Editing by Arun Koyyur)