Google is said to have rejected the offer, and is instead preparing to float early next year. An agreement between the two cannot be ruled out in the future. However, any deal could present serious regulatory and competition hurdles for Microsoft. The software giant has only recently emerged from a maze of litigation involving anti-trusts issues.

Investment bankers have been considering a float of Google for several months, and its market value is estimated at between $15 billion and $25 billion.

Sources close to the negotiations said last night that Google had not yet decided which bank would lead the underwriting of the float, which would be one of the biggest. The company has drawn up a shortlist of about 11 investment banks.

Google, founded by Sergey Brin and Larry Page, is understood to be considering selling its stock via an online auction, a method that was commonplace among new public offerings during the dot-com boom of the late 1990s.

Flotation business on Wall Street has dwindled to little more than a trickle in the past three years after the stock market crash that was triggered by the collapse of hundreds of dot-com, technology and communications companies.