MICROSOFT Corp withdrew its US$42.3-billion bid to buy Yahoo! Inc at the weekend, scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader Google Inc.

The decision to walk away from the deal came on Saturday after last-ditch efforts to negotiate a mutually acceptable sale price proved unsuccessful.

The talks reached breaking point after Jerry Yang and David Filo, the co-founders of Sunnyvale-based Yahoo, flew to Seattle to meet Microsoft Chief Executive Steve Ballmer and Kevin Johnson, who runs the software maker's unprofitable online services division, according to an unnamed source.

"Clearly a deal is not to be," Ballmer wrote to Yang in a letter sent late on Saturday. Microsoft was willing to pay US$47.5 billion, or US$33 per share, up from the bid's current value of US$29.40 per share, according to Ballmer's letter. But Yahoo's board demanded at least US$53 billion, or US$37 per share, according to Ballmer.

That would have been nearly double Yahoo's stock price of US$19.18 at the time Microsoft first made its bid a little over three months ago. And Yang, who became Yahoo's CEO 11 months ago, wanted US$38 per share last Wednesday, according to the person familiar with the discussions.

In a statement on Saturday, Yahoo Chairman Roy Bostock reiterated that Microsoft had undervalued his company's assets since the takeover tug-of-war began more than three months ago.

"We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets," Bostock said.

The anticlimactic ending came as a surprise, given that many analysts believed Microsoft wanted to close the deal badly enough to pursue a hostile takeover - a risk that would have required an attempt to replace the Yahoo board that rejected the bid.

Although Ballmer had threatened a hostile takeover attempt last month, he said he concluded that waging a so-called proxy battle was "not sensible."

"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition," Ballmer wrote to Yang.

But Yahoo hasn't necessarily faded from Microsoft's sights. The software maker conceivably could renew its bid later this year if Yahoo can't bounce back from more than two years of financial lethargy.

If Yahoo's turnaround efforts flop, many analysts believe the company's stock would sink into the mid-teens and open the door for another takeover offer that would be more difficult to rebuff.

For now, at least, Microsoft appears to believe it has enough weapons to chip away at Google's dominance of the booming Internet ad market.

"We have a talented team in place and a compelling plan to grow our business through innovative new services," Ballmer said.

"While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

Microsoft's move intensifies the pressure on Yang to reverse the lackluster growth that has eroded Yahoo's profits and depressed its stock price since 2005, making it vulnerable to an unwanted takeover.

Yang has projected that Yahoo's revenue will rise by 25 percent in 2009 and 2010, propelled by an expanded Internet advertising network that's using more sophisticated tools to target consumers.

But analysts haven't raised their forecasts to anywhere near Yang's predictions, reflecting doubts that may trigger a rebellion among Yahoo's restive shareholders if management doesn't deliver on its promises.

Yang, who started Yahoo with Filo in 1994, embraced the challenge in a statement on Saturday statement. "With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history."