Google and Yahoo! have made last-minute proposals to scale down their Internet advertising partnership in a bid to appease anti-trust regulators.

The companies offered concessions over the weekend to the US Justice Department, which is threatening to block the alliance, according to a report in The Wall Street Journal.

Google and Yahoo! are now willing to limit the amount of revenue generated from the partnership and shorten the deal’s duration.Google’s advertising customers would also be given the option to stop their commercials appearing on Yahoo!'s web pages.

Under the new plan, Yahoo! would be limited to getting no more than 25 per cent of its search advertising revenue from Google and their partnership would expire after two years. The original contract signed in June spanned 10 years and did not have any restrictions on how frequently Yahoo! could draw upon Google's technology for displaying ads alongside its search results.

Yahoo! had estimated Google's system would enable it to boost its revenue by $800 million annually, but the restrictions are calculated to cut that amount in half at least.

Representatives from both companies declined to comment directly, but confirmed the companies remain in talks with the Justice Department in hopes of winning clearance to join forces.

Anti-trust regulators have been taking a hard look at Yahoo!'s proposed reliance on Google's technology because the two companies combined control more than 80 per cent of the US search advertising market. Microsoft and advertisers in America and Europe have argued fiercely that the arrangement would enable Google to gradually increase advertising prices and exert more control over the flow of e-commerce. Google has said because prices are set by auction, this fear is unfounded.

The Justice Department signaled it was considering a legal challenge to the deal in September when it hired veteran antitrust lawyer Sanford Litvack to review the case.

Google had vowed to launch the Yahoo! partnership by mid-October, but backed off to avoid a legal battle that would have focused on the market power that Google has been accumulating while running the Internet's most profitable advertising network. Last night analysts said the deal was heading toward breaking point.

But Yahoo! is under intense pressure to do anything possible to boost its sagging profits after inflaming its shareholders by rejecting a

$47.5 billion takeover offer from Microsoft six months ago. Microsoft withdrew its $33-per-share offer after Yahoo! co-founder Jerry Yang held out for more money.

Mukul Krishna, digital media global director at consulting firm Frost and Sullivan, described the revised terms as "more of a Band-Aid than the extensive surgery that is needed" for Yahoo!.

"This sweetens the deal to go through antitrust red flags and gives Yahoo! CEO Jerry Yang some breathing space, but how much money it would add to Yahoo!'s top line would be very crucial," Krishna said.

"And it doesn't answer the question, what after two years?"

If the deal falls, then Yahoo! might have to return to Microsoft which has repeatedly said it is no longer interested.

Newly appointed Yahoo board member and investor Carl Icahn has again pressed for such a deal. He told CNBC: "We believe as large shareholders that eventually we at Yahoo should, if available, make a deal with Microsoft to do search. We could save a fortune at Yahoo if Microsoft could do search for us."

Google and Yahoo! stocks rose after the reported concessions. Google jumped 4.73 per cent to $362.88 and Yahoo! advanced 3.84 per cent to $13.24.

In the meantime, several executives have also left Yahoo! as the uncertainty about its future continues.

Yahoo! will appoint Jeff Dossett, a former Microsoft manager, to lead its US media business replacing Scott Moore, who is leaving the company to pursue other opportunities. Alan Warms, the general manager of Yahoo! News, is also quitting.

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