The breakdown, which came shortly after their chief executives met in Seattle, ends for now the possibility that the two tech giants could form a credible rival to Internet titan Google, which has a substantial lead in online advertising.

It also forces Microsoft, unrivalled in PC software dominance, to find another means of trying to find a foothold in the Web era.

The announcement followed a meeting on Saturday in Seattle between Microsoft's chief executive Steven Ballmer, and Yahoo's chief and co-founder Jerry Yang.

At the meeting, which also included Yahoo's other founder David Filo, Mr Ballmer increased Microsoft's offer to US$33 (S$45) a share, or about US$47.5 billion in total, from US$29.40 a share.

Mr Yang told Mr Ballmer that Yahoo would not accept an offer below US$37 a share, a person familiar with the deal said.

'Despite our best efforts, including raising our bid by roughly US$5 billion, Yahoo has not moved toward accepting our offer,' Mr. Ballmer said in a statement.

'After careful consideration, we believe the economics demanded by Yahoo do not make sense for us,' he added.

A person close to Yahoo said the price was not the only stumbling block. The person said Yahoo was also concerned that the deal could be blocked by regulators and wanted a higher offer, in part, as a hedge against that risk.

Microsoft pursued Yahoo for more than a year as its costly efforts to catch up to Google Inc in the booming market for Web advertising withered.

The deal would have given Microsoft access to Yahoo's 137 million monthly visitors.

Moreover, while Google is the pre-eminent leader in online search advertising - which represents 40 per cent of all online advertising - Yahoo commands some expertise in display advertising, a source of online revenue that is expected to grow rapidly.

Yahoo's founders, however, said they wanted to remain an independent firm, though they do plan to pursue an advertising partnership with Google, according to people familiar with the talks.

In a statement issued on Saturday night, Yahoo showed no regret about not joining Microsoft.

'This process has underscored our unique and valuable strategic position,' said Mr Yang.

But analysts said the withdrawal did not end all possibility that the two companies could unite.

Market watchers said Microsoft might be hoping that Yahoo's stock tanks enough that its management returns to the bargaining table willing to sell for less.

Most analysts predicted a sharp drop in Yahoo's share price, which had risen 7 per cent to US$28.67 on Friday in expectation of a Microsoft deal.

LOS ANGELES TIMES, NEW YORK TIMES, WASHINGTON POST