Steve Ballmer, Microsoft’s chief executive, moved quickly today to dismiss speculation that the software giant might still be interested in a takeover of Yahoo!, while leaving the door open on a more limited partnership.

"I'm sure there are still some opportunities for some kind of partnership around search," he told a business lunch in Sydney. But he left no doubt about the prospects of a full merger.

"We made an offer, we made another offer ... We moved on," he said. "Acquisition is a thing of the past."

Shares in Yahoo!, which had picked up on investor hopes that an acquisition was in the offing, fell sharply. In morning trading on the Nasdaq the stock price stood at $11.91, down around 14 per cent.

Google pulled out of a search advertising partnership with Yahoo! earlier this week, prompting renewed talk of a deal with Microsoft. Jerry Yang, Yahoo!'s chief executive, had admitted that he was open to a new deal with Microsoft. Earlier this year, Yahoo! rejected bids from Microsoft, which offered $47.5 billion for the internet business.

Mr Yang told the Web 2.0 Summit conference in San Francisco on Wednesday: "To this day, I would say that the best thing for Microsoft to do would be to buy Yahoo!. We remain open to everything but it has to make sense."

In an on-off courtship that has lasted nearly a year, his comments prompted analysts to conclude that some sort of deal with Microsoft might be back on, particularly as the company may now be bought at a fraction of the May offer price.

However, Mr Ballmer, sounding not unlike a spurned lover, said: "We made an offer, we made another offer and it was clear that Yahoo! didn't want to sell the business to us and we moved on. We are not interested in going back and re-looking at an acquisition. I don't know why they would be either, frankly. They turned us down at $33 a share."

But the Microsoft CEO left the door half open for a partnership on search, an area where Mr Ballmer has said that Microsoft needs to up its game. Yahoo! is a distant second to Google in the search market, but combining the power of Microsoft’s Live Search and Yahoo! search could begin to give Google some competition, something advertisers are keen to see.

"Everybody needs a good competitor, and we just want the other guys in this business to have a good competitor that they have to think about every day," Mr Ballmer said.

He had a go at Google and other search engines and said Microsoft saw an opportunity to "reinvent the whole darn thing". He added that the average English language search was 2.2 words because users had worked out that "search engines are so dumb that if you tell them more they actually do a worse job."

"If anybody thinks the future of search is going to look like the present search, that's crazy. The user interface on search hasn't changed for six years. You still get the same dull, boring ten blue links, for God's sake. Can't we do any better than that?" he said.

Yahoo! is already making progress in this field with its new open platform strategy. It has launched SearchMonkey, which embeds selected search results into more elaborate packaging. A pizza delivery service appearing in the search results, for instance, can add an address, phone number, map and customer reviews to the usual name with a blue website link.

Yahoo! has also developed BOSS (Build your Own Search Service), which allows third parties to repackage, reorder, and remix Yahoo! search results - with revenue-sharing or Yahoo!-supplied advertising.

Microsoft attempted to buy Yahoo!'s search engine for $1 billion back in the spring and when Yahoo! turned that down, Mr Yang turned to the Google partnership in an attempt to fend off the Redmond company, gain some much-needed revenue and placate shareholders furious that the Microsoft deal had not been done.

It was estimated that Yahoo! could have made up to $800 million a year from the Google partnership, but advertisers feared that the joint venture would lead to a rise in prices for search advertisements. When US antitrust regulators indicated they were against the deal, Google pulled out.

David Drummond, senior vice-president and chief legal officer of Google, said the company was not prepared to damage its reputation or relationships with clients by embarking on a legal battle against the US Justice Department.

It remains unclear where Mr Yang will turn next. Yahoo! has been in talks with Time Warner about the possible acquisition of AOL and its online ad business. But there appears to have been little progress. With the door to a limited partnership still ajar, a Microsoft/Yahoo! search tie-up is still probably the best outcome for both companies, despite Mr Ballmer's bluster. The courtship might just have to go on a bit longer.

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