Microsoft is in discussions with News Corporation, parent company of The Times, about a possible joint bid for search engine Yahoo! that could tilt the takeover battle decisively in favour of the predators.

News Corp had been involved in discussions about acting as a white knight to stop Microsoft but the media group’s willingness to switch sides could allow Microsoft to submit a higher offer and win over Yahoo!’s board.

Meanwhile, Yahoo! hopes to make progress with Time Warner. Yahoo! continues to hold discussions about a deal that would see Time Warner inject its AOL division for a 20 per cent stake in the enlarged group.

Time Warner is considering whether to sweeten AOL with cash, which could in turn be used by the enlarged Yahoo! to buy back some stock at a premium to the current price, at about $35 to $40 per Yahoo! share.

The twin developments suggest that the two-month-old takeover battle is finally nearing its end. Yahoo! rejected Microsoft’s $39.4 billion (£19.96 billion) hostile bid, and has been trying to work up a rescue in an apparent recognition that it must give shareholders an alternative.

Yahoo! shares added 86 cents, or 3.1 per cent, to $28.63 as Wall Street hoped that a higher bid would materialise. They remain below the $29.39 cash and shares offer, which was lifted by a 33 cent improvement in Microsoft’s share price to $29.22. News Corp’s voting shares eased 3 cents to $19.50 in lunchtime trading in New York.

News Corp is willing to inject MySpace, its social network site, into the Microsoft bid, and may provide some extra cash. That would create a company that would bring together the No 2 search engine in Yahoo!, with the leading web e-mail services in Microsoft’s MSN and Yahoo Mail, plus the leading social network.

Wall Street analysts said that Microsoft remained the favorite to land its target. Heather Bellini, at UBS, said: “In our view Yahoo! management would have a difficult time convincing a majority of its shareholders this deal is worth more than Microsoft’s offer.” She added: “Even if [Yahoo!] shares were repurchased at $35-plus a share, the shares likely would pull back once the buyback is done.”

The negotiations emerged a day after Yahoo! made some concrete progress in its own defence, striking an eyebrow-raising deal with Google, to use its rival’s technology in its own search engine advertising.

Although billed as a test in the US only, analysts at Citigroup estimated that if Yahoo! were to outsource its search engine advertising to Google worldwide, it could generate an extra $1 billion in cash flow to the company.

Google wants Yahoo! to remain independent, arguing that the Yahoo! Silicon Valley culture is not compatible with the Seattle software giant. But the leading internet company is also unlikely to welcome the greater competition that a Microsoft-owned Yahoo! would bring.

Meanwhile Capital Research & Management, the big US mutual fund, doubled its stake in Yahoo to 10.1 per cent.

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