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Despite Microsoft's earlier insistence that its initial $31 per share bid was its final price, CEO Steve Ballmer has revealed that the company was prepared to raise its offer to $33 - adding $5 billion to the value of the takeover.

However, Ballmer claims that Yahoo was seeking a further $5 billion to complete the deal.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Ballmer says in a statement. "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."

In an open letter to Yahoo CEO Jerry Yang, Ballmer has also withdrawn Microsoft's threat to take a hostile bid directly to Yahoo's shareholders, following talks this week between

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the two firms.

"After giving this week's conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders," Ballmer writes.

"This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft."

One such step is Yahoo's proposal to outsource its search advertising to Google, a move that Ballmer claims would cause all manner of competitive, regulatory and recruitment problems.

Yahoo "undervalued"

Yahoo has issued a statement in response to Microsoft's withdrawal, which continues to insist that the price the software giant was prepared to offer for Yahoo was still too low.

"From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view," says chairman Roy Bostock.

"Yahoo is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market."

And Yahoo CEO Jerry Yang insists he's happy to see the back of Microsoft. "With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximise our potential to the benefit of our shareholders, employees, partners and users," he claims.