Yahoo Inc has resolved a dispute with partner Alibaba Group over the Chinese company's transfer of its prized online payments unit to its CEO Jack Ma, two sources close to the matter said.

Yahoo's feud with Alibaba, 43-percent-owned by the U.S. firm, over the Chinese company abruptly transferring Alipay, has knocked Yahoo's shares by about 10 percent since early May.

The two companies reached an agreement before Yahoo's analyst meeting last Wednesday, one of the sources said. But the deal requires the consent of Softbank Corp founder Masayoshi Son, an Alibaba board member, who has been reluctant to come to the negotiating table, the sources said.

A Softbank spokeswoman said the negotiations were still going on and declined further comment.

Yahoo's stake in Alibaba and its 35 percent ownership in Yahoo Japan are considered the U.S. Internet company's most valuable assets. Softbank holds a major stake in Alibaba and also 42 percent of Yahoo Japan.

Yahoo Japan shares were up 2.4 percent by 0420 GMT, while Softbank shares were flat. Shares in Alibaba.com, the listed unit of Alibaba, edged up 0.2 percent in Hong Kong.

Shares of Yahoo closed up 3.3 percent at $16.55 on the Nasdaq on Tuesday.

Yahoo claimed it had been blindsided last month by Alibaba's

restructuring of Alipay, an online e-commerce payment similar to eBay Inc's PayPal, to Alibaba Chief Executive Officer Jack Ma.

Alibaba countered that Yahoo was aware of the transaction by virtue of having a board seat now held by former Yahoo chief executive and director Jerry Yang.

Alibaba and Yahoo declined to comment on the agreement.

A source familiar with the matter said Yahoo is encouraged with the progress of the discussions.

Terms of the agreement include points made during Yahoo's analyst meeting last week, according to the sources. Yahoo Chief Financial Officer Tim Morse said the company was still in negotiations with Alibaba and laid out a framework for a deal involving compensation and value of Alipay.

Morse likened the relationship between Alipay and Taobao, the largest online shopping website in China and a subsidiary of Alibaba and Yahoo Japan, to that of PayPal and Ebay Inc. The executive said the economic arrangement needs to remain intact in order to create value.

The Alipay transfer and its timing is only a small act in a larger drama playing out among Alibaba Group, Softbank and Yahoo, led by CEO Carlo Bartz.

Alibaba's Ma has made it clear he wants to reduce Yahoo's stake in the company, while Softbank and Yahoo in March were in advanced talks for Yahoo to leave its Japanese joint venture transferring its stake to Softbank.

Elinor Leung, a CLSA analyst in Hong Kong, said that even if the two companies were able to agree on Alipay's asset transfer issue, the bad blood that runs between the two is unlikely to change.

I don't think it's going to resolve the tensions between Yahoo and Alibaba Group, she said. If they can agree on something right now, the concern (regarding this issue) may become smaller in the future but whether Yahoo's CEO agrees with Alibaba's way of running its business in China are two different things.

Last week Yahoo's Morse said Yahoo had made some nice progress in looking at a number of tax-efficient options, including a traditional spinoff or issuing a so-called tracking stock, which would track the performance of the Japanese unit without conferring ownership.

We really want to do something with these assets. We're not up here saying 'yeah, yeah, we're talking,' Yahoo Chief Executive Carol Bartz told investors during the analyst meeting last week.

Yahoo is still mulling a number of options, including the separation of its entire Asian businesses, including Alibaba, said a source close to the matter.

Some investors believe those assets could potentially be worth as much as Yahoo's entire current market value and are betting that an IPO by Alibaba, or one of its subsidiaries, could boost Yahoo's valuation.

In the past, investors have also called for Yahoo to sell off part of its investments and buy back its own shares. (Additional reporting by Kazunori Takada in SHANGHAI; Editing by Matthew Lewis and Anshuman Daga)

China Yahoo