Microsoft and Yahoo are in talks for a less ambitious partnership, but neither side is discounting the possibility of another Microsoft takeover attempt of the Internet portal.

Microsoft, which withdrew its acquisition offer earlier this month after failing to agree with Yahoo on an a price, says it is still looking for ways to improve its online services and advertising business. Neither side offered details of the proposal in statements released Sunday.

Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! the company said.

Yahoo responded, saying its board of directors will evaluate each of our alternatives, including any Microsoft proposal.

Microsoft's less dramatic proposal may be a pre-emptive move to give Yahoo an alternative to a possible deal with Internet search leader Google. Yahoo and Google are in talks about a possible advertising partnership after they recently concluded a limited test run of Google text ads on Yahoo's search results page.

Since the merger talks were scuttled, Yahoo has come under pressure from some shareholders who would have preferred to accept to accept Microsoft's $33 per share offer.

Last week, billionaire activist investor Car Icahn, disclosed he had acquired a stake in the portal and said he would nominate an all new board of directors for Yahoo's upcoming shareholders meeting. His stated aim is to replace the current board and push for the sale of Yahoo to Microsoft.

Microsoft is keeping its options open, signaling that it may try for an acquisition later and could seek support from shareholders and other parties.

Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and

discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties, the company said.

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