Yahoo! today settled its acrimonious battle with billionaire activist investor Carl Icahn, who will join the US internet search giant as a director.

With just 11 days to go until a crucial shareholders' vote on August 1, the internet company also announced that it will expand its board by two seats to 11 members.

The two new seats will be filled from a list of nine candidates that Mr Icahn will propose, including Jonathan Miller, the former chief executive of AOL, the internet arm of Time Warner.

Last week, AOL met for formal talks with Microsoft to discuss a $40 billion (£20.02 billion) break-up of Yahoo!. Microsoft had hoped to buy Yahoo! for $47.5 billion but stepped back from a deal after being rejected by the company.

Mr Icahn, who will replace Robert Kotick, Activision Blizzard's chief executive, who will not stand again for re-election, had wanted to oust Yahoo!’s directors and put in place his own hand-picked slate to negotiate a sale of all or part of the business.

The billionaire, who holds a roughly 5 per cent stake in Yahoo, has agreed to withdraw his nominees from consideration and vote his stake in support of the board’s nominees.

Jerry Yang, co-founder and chief executive at Yahoo!, said: “This agreement will not only allow Yahoo to put the distraction of the proxy contest behind us, it will allow the company to continue pursuing its strategy of being the starting point for Internet users and a must buy for advertisers.”

Yahoo! said Roy Bostock, Ronald Burkle, Eric Hippeau, Vyomesh Joshi, Arthur Kern, Mary Agnes Wilderotter, Gary Wilson and Jerry Yang would stand for re-election.

Mr Icahn said he continued to believe a sale of the company or its search unit must be given full consideration.

But he added: “I share the view that Yahoo!’s valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders.”

Microsoft wants to buy Yahoo! so that it can better compete with Google, the world’s largest internet company, and grab a bigger share of an online advertising market estimated to be worth about $40 billion a year and expected to double by 2010.

After Yahoo! and Microsoft walked away from talks, Mr Icahn acquired his stake in Yahoo! and tried to force Microsoft and Yahoo! to restart discussions.

He was angry that Yahoo!’s directors, led by Jerry Yang, its co-founder, refused to allow shareholders to vote on whether to accept any deal.

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