Yahoo! is still having "ongoing, engaged conversations" with Microsoft, it was revealed today, prompting speculation that the software giant may renew its $47.5 billion bid for the struggling internet portal.

Yahoo!'s president, Susan Decker, said that there were still "many ways in which a combination" of the two companies may be beneficial, in remarks that pushed Yahoo!'s share price up nearly 3 per cent in morning trading on the NASDAQ.

Earlier Carl Icahn, the billionaire investor, said that he would remove Jerry Yang, Yahoo!'s besieged chief executive, if his bid to replace Yahoo!'s existing board with a proxy slate of directors at a July shareholder meeting was successful.

Mr Icahn said that Mr Yang would have to be replaced as chief executive as a pre-requisite to Microsoft resuming talks with Yahoo! because of what Mr Icahn saw as an in-built resistance on the part of Mr Yang to being taken over by the software giant.

"I am amazed at the lengths Jerry Yang and the board went to to entrench themselves in this situation," Mr Icahn told the Wall Street Journal in an interview. "In my opinion you might have to get rid of Jerry and part of the board to bring back Microsoft."

Yahoo! responded by saying that Mr Icahn's remarks "ignored the factual record." It said that Mr Yang and the board had always maintained they would consider any proposal by Microsoft that was "in the best interests of shareholders."

Mr Icahn, who has already prepared a proxy slate which would remove ten directors from the Yahoo! board, made his remarks after the publication of court documents which suggest that Yahoo! may have attempted to increase the cost of a potential acquisition by Microsoft by introducing an expensive employee retention plan.

According to the documents, obtained as part of a legal action by Yahoo! shareholders, Mr Yang had pushed for a severance package which would have cost Microsoft between $462 million and $2.1 billion should its original offer of $31 a share have been accepted by Yahoo!

Mr Yang's insistence on the more costly package came despite both the misgivings of the consulting firm which Yahoo! had hired to devise the plan, and assurances by Microsoft's chief executive, Steve Ballmer, that Microsoft would offer Yahoo! employees $1.5 billion in retention packages, the documents suggest.

Mr Icahn, who has spent more than $1 billion to acquire a 4.3 per cent stake in Yahoo!, indicated that he would give more details on his campaign to overthrow the Yahoo! board in the next day or so.

Microsoft withdrew its offer for Yahoo!, which was first made in January, on May 3. The two companies have since spoken about the possibility of a more limited deal, which may involve Microsoft buying part of Yahoo!, and two weeks ago Microsoft said it "reserved the right" to reconsider a full acquisition "depending on future developments and discussions."

A showdown is now set for Yahoo!'s annual shareholder meeting, which Yahoo! announced this week would be held on August 1.

Separately, Yahoo! today announced it agreed a "multi-year" relationship with Walmart to place display and video advertisements on the retailing giant's websites. It also said it had struck a deal with CBS, the television network, to stream the content on its TV portal, Yahoo! TV.

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