Shares in Yahoo! plunged after Steve Ballmer, Microsoft chief executive, categorically ruled out buying the struggling internet company.

The remarks by Mr Ballmer at the Microsoft shareholders meeting disappointed investors who had been hoping that the acquisition was back on after Jerry Yang said he was stepping down as Yahoo! chief executive.

At close Yahoo! shares fell by more than 20 per cent to $9.14, wiping out gains on the news of Mr Yang's departure.

Asked by a shareholder about the situation with Yahoo!, Mr Ballmer said: "Let me be as clear as I think I've tried to be publicly. We are done with all acquisitions, discussions with Yahoo!. I've said that a bunch of times. Somehow some people have gotten confused, nonetheless."

He added: "But we did our best. We thought we had something that made sense. Didn't make sense to them. We've moved on."

At the same time Mr Ballmer re-opened the door to buying Yahoo!'s search business. He said that if Yahoo! were still interested in a deal, then Microsoft would be. "I think it is an interesting possibility to look at a search collaboration with Yahoo! as we had proposed last summer. There's no active discussion on that front. But we'd be very open to it. But acquisition discussions are finished."

Microsoft withdrew its $47.5 billion buyout offer for Yahoo in May after Mr Yang and his board rejected the bid as too low. The software company then offered to buy Yahoo!'s search business for $1 billion, but Yahoo! decided instead to sign a search advertising deal with Google. The Google deal fell apart earlier this month, after opposition from US antitrust regulators who were concerned about a partnership between the Web's two biggest search companies.

Yahoo! is unlikely to get the same offer again from Microsoft for its search business. The economic downturn has seen online ad revenue shrink, particularly in the display ad market, one of Yahoo!'s strengths.

But Microsoft is keen to take on Google dominance of the search market where it has a huge advantage. The Microsoft Live search engine is a bit part player but acquiring Yahoo! search, which has about 20 per cent market share, would put it back in the game, analysts say.

Rumours also emerged yesterday of the departure of Yahoo's vice-president of search technology, Sean Suchter, to Microsoft. The Valleywag blog, which reported the move, commented: "If Microsoft has recruited Suchter, it has gotten the heart of Yahoo!'s search technology without the fuss of actually buying it."

Some analysts have interpreted Mr Ballmer's public denials of interest in a Yahoo! buyout as a negotiating ploy, and suspect Microsoft might still want to acquire Yahoo! at a low price, in hopes of improving their joint position in online search and advertising.

However, analysts have also said Microsoft is likely to wait until next year before deciding, giving it time to watch Yahoo!'s performance and study the antitrust regulatory climate in a new administration in Washington.

In the meantime Yahoo!'s board led by chairman Roy Bostock is searching for a new chief executive. Mr Yang will step down as soon as one is found. Investors have said they want an outsider to come into the company to shake it up and lead negotiations with Microsoft.

In his remarks at the Microsoft shareholders meeting, broadcast on the net, Mr Ballmer attempted to reassure shareholders that Microsoft can thrive despite the economic downturn, citing the software maker's long-term research and development spending and new products.

When a shareholder, alluding to Microsoft's languishing stock price, asked Mr Ballmer when Microsoft's best years would arrive, the CEO countered that every year is Microsoft's best year. He added: "If we could get this economic thing headed in the right direction. I'm not going to pretend we have control over that."

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