Yahoo Inc (YHOO.O) and Microsoft Corp (MSFT.O) ended talks as the Web pioneer agreed to let archrival Google Inc (GOOG.O) sell search ads on its site, the companies said on Thursday.

Separate statements from Microsoft and Yahoo signaled a more permanent rift between the two after months of on-again, off-again talks. It also heightened pressure on Yahoo to outline an alternative strategy. Yahoo shares fell 10 percent.

Yahoo said it had agreed to let Google put search ads on its site in what it called an $800 million annual revenue opportunity that would boost cash flow by $250 million to $450 million in the first 12 months.

Yahoo's ads and Google's would be pitted against each other in an auction style process that could make a deal easier to pass regulatory approval.

"Yahoo is being a reseller of Google whenever it makes sense and that is likely to be a lot of the time given how much more effective Google Web search ads have proven to be," Global Crown Capital analyst Martin Pyykkonen said.

The deal is expected to face a major antitrust review given the rising power of Google, and Sen. Herb Kohl, a Wisconsin Democrat and chairman of a U.S. Senate antitrust subcommittee, said he would investigate the deal.

Microsoft had sought a tie-up with Yahoo for more than a year and by early May had offered up to $47.5 billion, or $33 per share, to buy the Internet company.

Its latest offer included buying Yahoo's search business and paying $35 per share for a 16 percent stake in Yahoo, said two people briefed on the matter but not authorized to speak publicly about it.

After talks fell through, Yahoo shares fell to $23.52 on Nasdaq. Following details of the Google deal, they rose to $24.00 in after-hours trade.

Microsoft had hoped a Yahoo deal would accelerate its ability to capitalize on Web advertising growth and compete with Google, which is increasingly fighting for the same Internet audience.

Yahoo said on Thursday that Microsoft had made it clear in a meeting on June 8 that it was no longer interested in buying the company outright, even at the price of $33 per share Microsoft had most recently proposed.

That may not appease Yahoo shareholders, including billionaire Carl Icahn, who have been pressuring Yahoo to reach a deal with Microsoft. Icahn has called for Chief Executive Jerry Yang to be ousted.

Microsoft said it was not interested in "rebidding" for all of Yahoo, sending its shares up more than 4 percent as investors showed relief that the company would not be paying too high a price for a deal they considered risky.

On Thursday, Yahoo said that an alternative Microsoft proposal to buy only its search business did not fit into Yahoo's plan to grow search and display advertising.

Microsoft said in a statement that its alternative offer was still open for discussion. It said that its most recent discussion with Yahoo for a partial deal would have valued Yahoo at more than $33 per share.

THE END?

Analysts said they did not expect that Yahoo and Microsoft would try another round of negotiations.

"It certainly seems to be the end," said Derek Brown, an analyst at Cantor Fitzgerald. "In their most recent discussions, they were talking about totally separate visions of both a deal and the future."

Microsoft is expected to soon be on the prowl for other acquisition targets since it has not given up its goal for online advertising.

"Microsoft will keep trying," said Morningstar analyst Toan Tran. "Yahoo is one of most popular sites on the Web and there is no one else with as much traffic. AOL may be one option and it may not be as expensive."

Icahn, who has waged a proxy battle to remove Yahoo's board at its August 1 annual meeting, had urged Yahoo to secure a higher price from Microsoft. Icahn has said a partnership with Google should only be a second choice.

Icahn could not be reached for comment.

Yahoo shares sank as low as $22.50 on news of the talks failing and expectations of the Google deal. It was their lowest level since January 31, the day before Microsoft announced its offer for the company.

Google shares finished up $7.75 at $552.95, and Microsoft closed up $1.12 at $28.24.

Source: Yahoo