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Microsoft walked away from its pursuit of Yahoo two weeks ago after three months of negotiations when Yahoo's board rejected Microsoft's sweetened offer of $33 a share, saying the company was worth at least $37 a share.

But over the weekend it issued a statement sating that it is "considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo." It did not clarify what that alternative might be.

Microsoft emphasised it was not proposing to make a new bid to buy all of Yahoo, after recently being rebuffed, but could reconsider.

Yahoo replied later on Sunday that it continued to consider a number of strategic alternatives and was "open to

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pursuing any transaction which is in the best interest of our stockholders." It added it had confirmed with Microsoft that it was not interested in "pursuing an acquisition of all of Yahoo at this time."

Microsoft's new approach is not thought to have appeased activist investor Carl Icahn, who launched a campaign last week to replace Yahoo's board with directors who would reopen talks with Microsoft. Icahn, in common with many analysts and observers, believes Yahoo acted irrationally in refusing Microsoft's $47.5 billion bid.

Icahn is now likely to press Yahoo to further pursue a possible alliance with Google, a source said.

"Microsoft is trying to get the milk without buying the cow, and if you look at Icahn's history, he has never been used that way," said the source. "He does not want to see Yahoo pushed into some joint venture with Microsoft and is not going to be used to push Yahoo into it."

The New York Times reported that Microsoft and Yahoo may form a partnership or joint venture for search-related advertising to take on Google, which dominates the search market with a share significantly larger than a combined Yahoo and Microsoft.

In the meantime Yahoo continues to talk with Google about a search advertising partnership and a deal could come as early as this week.