Yahoo! has been linked to a possible $1 billion ($527m) acquisition of Facebook, the American college-based social networking site.

The news follows a profits warning from Yahoo! earlier this week which sent the group’s stock sharply lower, raised fears over a cyclical downturn in online advertising and prompted calls from analysts for chief executive Terry Semel to clarify the group’s strategy.

A Yahoo! spokesman told Times Online that a report in the Wall Street Journal which said the company has held "serious discussions" with privately owned Facebook was "based on speculation". However, he pointed out that online communities are already playing a major part in the internet giant’s business.

"Where you have large numbers of people engaging with each other online, Yahoo sees great opportunities for monetisation," he said. "Community has been a major part of our strategy for some time."

The group, which claims nearly 500 million users worldwide, already has a blogging tool, Yahoo 360, and a Yahoo Group, which allows people interested in common subjects to congregate online.

Facebook has so far catered exclusively for college students, allowing them to share details of their lives with other members, but recently announced plans to open its site to others in a move that could increase user numbers and increase its attractiveness to buyers.

Already the site has reportedly held talks with software developer Microsoft and Viacom, the media conglomerate, amid growing excitement over the social networking sector’s potential to deliver advertising revenues. Earlier this year, BusinessWeek reported that Facebook had turned down a $750 million offer and hoped to fetch as much as $2 billion.

A failure to buy MySpace.com, the leading social networking site with more than 100 million users, which was acquired for $580 million by News Corporation, parent company of Times Online, is thought to have played a central role in the ouster of Tom Freston as chief executive of Viacom. The company's new chief executive, Philippe Dauman, said this week he was looking at small acquisitions, but "only if they complement what we're doing internally."

In contrast, Facebook, which was founded by former Harvard student Mark Zuckerberg when he worked on a project to put the Ivy League college’s yearbook online, has less than 10 million users.

College graduates are a group highly sought-after by advertisers, but Facebook's recent experiences suggest they do not appreciate their loyalties being tested. The site faced a user revolt recently when it introduced a system that automatically informed users of changes in other Facebook members' profiles and was forced to withdraw the feature.

Analysts have speculated that efforts to target adverts at specific users could meet similar privacy concerns.

Microsoft this week signalled its intention to battle in the market to host user-generated content when it launched Soapbox, an online video sharing service that will go head-to-head with YouTube.

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