Microsoft Corp's assault on search engine leader Google Inc took a major step forward on Thursday as U.S. and European regulators cleared the software company's search partnership with Yahoo Inc.

The 10-year deal, struck last July, is the biggest effort yet by Microsoft to establish an online business to rival Google, an area where Microsoft has lost $5 billion over the last four years.

Microsoft really has room to throw money at this, said Kim Caughey, senior analyst at Fort Pitt Capital Group. I think it can work. If they can make inroads in specific target areas, they could have something positive to report.

Microsoft has already made some progress with its search engine, Bing, picking up 3.3 points of market share since its launch last June. But Bing is not likely to push Google off a very big pedestal any time soon, said Caughey.

The battle for online search ads is only one front on a sprawling war for revenue between Microsoft and Google, which also encompasses operating systems and mobile phones. But neither has yet managed to compete on equal terms in each other's core market.

In terms of our modeling, we really don't see any impact from Microsoft-Yahoo on our Google numbers, said Clayton Moran, an analyst at The Benchmark Co.

It doesn't change much in terms of the competitive dynamics of the industry right away, he warned. From a Google perspective, looking out over the next couple of years, it's a nonevent.

The deal, cleared unconditionally by the Department of Justice and the European Commission on Thursday, is not expected to impact Microsoft's bottom line, but could lay the foundation of a profitable online business.

Really now, the goal is about share gain. If we grow share, we will grow our way into profitability, and we have confidence we can do that, said Microsoft's Yusuf Mehdi, who is charged with making Bing and the MSN portal a financial success, in an interview with Reuters earlier this month.

Microsoft shares rose 1.2 percent and Yahoo's rose 0.7 percent on Nasdaq, in a broadly higher tech market.

The Justice Department's Antitrust Division said the deal was unlikely to substantially lessen competition.

U.S. market participants had expressed support for the partnership as a way to create a more viable alternative to Google, the division said in a statement issued late Thursday.

Google, which did not oppose the partnership, did not comment specifically on the regulatory approval but said that there has always been robust competition in the search ad business. Its shares rose 1.1 percent.

HOW IT WORKS

The deal means Bing becomes the search engine for Microsoft and Yahoo sites, while Yahoo focuses on attracting big advertisers.

Microsoft will handle the automated auction of search ads for use on both companies' sites, and pay Yahoo a portion of search ad sales generated on Yahoo pages.

Microsoft is hoping that by making itself a single conduit for advertisers to access customers on both sites, it will become a credible alternative to Google.

Last month Yahoo handled 17 percent of U.S. Internet searches, while Microsoft took 11.3 percent, according to comScore. Theoretically, that would now give Microsoft over 28 percent of search traffic, against Google's 65.4 percent.

At 30 points we are now a credible option, so that number matters, said Mehdi earlier this month.

Globally, Google is even more dominant, with 90 percent of the search market compared with 7.4 percent for a combined Yahoo and Bing, according to November data from Web research firm StatCounter.

FULLY COMPLETE EARLY 2012

The Microsoft-Yahoo deal was broadly expected to gain approval, but some had thought the companies might have to alter the deal's terms.

The partnership took months to hammer out last year. It followed Microsoft's aborted $47.5 billion Yahoo takeover attempt the year before. Google abandoned its own advertising deal with Yahoo in 2008, which Microsoft opposed, under pressure from the U.S. Justice Department.

Approval means Microsoft can begin the task of putting its Bing search engine into Yahoo sites. Neither company has laid out exactly how Yahoo's new search pages will look, but they will essentially be Bing searches with some customization of results by Yahoo.

The companies aim to get the partnership fully operational in the United States by the end of this year, with the transition of advertisers taking place before the holiday shopping season, if possible. The partnership should be globally complete by early 2012.

The deal had already been cleared by regulators in Australia, Brazil and Canada, but needed U.S. and European approval to take effect. The companies said they are still working with regulators in Korea, Taiwan and Japan.

(Additional reporting by Foo Yun Chee in Brussels and Ian Sherr in San Francisco; editing by Andre Grenon and Richard Chang)

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