Yahoo Inc said on Thursday that talks with Microsoft Corp on a partnership or other type of deal have concluded without an agreement, sending Yahoo shares down by 13 per cent.
Sources familiar with the matter said Yahoo is close to a search deal with Google Inc instead.
Yahoo shares sank to $22.68 on news of the talks breaking apart and the potential Google deal, reported by the Wall Street Journal and the TechCrunch blog. Google rose 0.6 per cent at $548.18, while Microsoft rose 3 per cent at $28.02.
Google's dominance in web search prompted Microsoft to offer up to $47.5 billion to buy Yahoo.
But Yahoo said on Thursday that Microsoft made it clear in a meeting on June 8 it was no longer interested in buying the company outright.
A more recent proposal by Microsoft to only buy Yahoo's search business did not fit into Yahoo's view of benefiting from growth in both the search and display advertising businesses combined.
Microsoft declined comment.
Yahoo faces mounting pressure from investors, including billionaire Carl Icahn, who urged the company to seal a deal with Microsoft but for a higher price. Icahn said a partnership with Google should only be a second choice.
Icahn could not immediately be reached.