By Deborah Mary Sophia and Arsheeya Bajwa

(Reuters) -Intel shares jumped almost 4% in early trading on Tuesday, as a chip-making deal with Amazon's cloud business gave a major stamp of approval to its money-losing contract manufacturing business.

After a near 60% slump in Intel's shares this year, the deal provides some respite to strained investors as the once-leading chipmaker bets its future on a costly turnaround hinging on its foundry unit.

Intel will build custom AI chips for Amazon Web Services (AWS) as part of the multibillion-dollar deal, expanding a years-long partnership between the companies.

"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 is on track to add more than $3 billion to its market value, if gains hold. It fell below $100 billion for the first time in three decades this year.

The company missing out on AI-linked demand is partly to blame for the stock lagging far behind competitors like Nvidia and TSMC, the world's largest contract chip manufacturer.

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.

While a significant step forward, the deal alone is not enough to drag Intel out of its slump, analysts said. Intel would need to manufacture chips for the likes of Nvidia and AMD, both TSMC's customers, in order to fully establish itself, said Hans Mosesmann, an analyst at Rosenblatt Securities.

Intel will also pause fab projects in Poland and Germany for 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 U.S.-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," said Russ Mould, investment director at AJ Bell.

($1 = 0.8978 euros)

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