Microsoft and Yahoo! are in fresh talks about teaming up to launch an all-out assault on Google to try to topple the online search giant from its dominant position on the internet.

Rumour was rife on Wall Street yesterday that Microsoft was set to launch a $55 billion (£27.5 billion) takeover bid for Yahoo!, but sources close to the deal said that plans to merge parts of the two operations were also being discussed.

Yahoo! is understood to be keen to study a big joint venture or a merger of Microsoft’s internet assets and all or part of Yahoo!. Such a combination would be designed to pool online revenue from both companies and to develop new internet advertising technologies. Microsoft is not interested at this stage in pursuing a hostile bid, the sources said.

Microsoft and Yahoo! held similar talks last year, but they were abandoned without reaching a conclusion.

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Google has since stepped up its dominance of the online advertising market with several acquisitions, leaving Yahoo! and Microsoft’s MSN arm trailing behind by all measures.

The latest talks, which are in the earliest stages, are between executives from Microsoft and Yahoo!. Goldman Sachs, the Wall Street investment bank, is advising Microsoft.

It is understood that Microsoft initiated the latest tie-up talks and it is the more aggressive of the two in the talks.

Neither of company, nor Goldman Sachs would comment on the talks, first reported by The New York Post, owned by News Corporation, the parent company of The Times.

Yahoo! shares soared as the market opened yesterday, and were up 17 per cent at $33.42 by lunchtime on Wall Street. Microsoft was off by more than 1.5 per cent at $30.49, while Google was flat at $472.93.

At first glance a merger of Microsoft and Yahoo! would indeed close the gap with Google in internet search market share. Together, Microsoft and Yahoo! would have 38.4 per cent of the market, against Google’s current 48.3 per cent.

Before yesterday’s share price surge, Yahoo!’s stock had disappointed for more than a year and it had a market value of about $38 billion. Microsoft, valued at $296 billion, would have to pay up to $50 billion to buy the online operator, analysts say. However, an all-out bid would be uncharacteristic of Microsoft, which has not made a big acquisition in its 32 years.

Scott Kessler, a Standard & Poor’s analyst, said that he did not feel that a full merger of Microsoft and Yahoo! made financial sense. Other analysts praised it as a rapid way to build up a competitive position.

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