Activist investor Carl Icahn spoke out in favor of a search deal between Yahoo Inc and Microsoft Corp, as talks between the two companies appeared to regain momentum.

Icahn declined to comment on the state of any negotiations between Yahoo and Microsoft. He had tried to broker a partnership between the two companies last year, when talks on Microsoft's $47.5 billion takeover bid for Yahoo fell apart.

I've been a strong advocate of getting a search deal done with Microsoft, Icahn, who owns about 5 percent of Yahoo and is a director on its board, told Reuters on Friday.

It would enhance value if a deal got done, because of the synergies involved, he said in a phone interview.

Microsoft and Yahoo are close to a long-discussed search and online advertising deal, which could be announced in the next week, according to another source familiar with the matter who is not associated with Icahn.

The news was first reported by the AllThingsDigital blog, which said a deal would involve Microsoft paying Yahoo several billion dollars upfront to take over its search advertising business and guarantee certain payments back to Yahoo.

The two companies have talked about cooperating for months, after Microsoft's bid to buy Yahoo was rebuffed last year and Yahoo's attempt to seal a search advertising deal with Google Inc fell apart under regulatory scrutiny.

Yahoo Chief Executive Carol Bartz said in May that any deal to spin off or combine its search assets will require a partner with boatloads of money. She said at the time that Yahoo was talking a little bit with Microsoft, but gave no details.

Bartz is currently out of the office for two weeks, following knee replacement surgery, according to an email that she sent to her employees earlier this month.

Icahn, whose firm had a 5.4 percent stake in Yahoo as of March 31, said he remains a strong supporter of Bartz, who took the reins in January from Yahoo co-founder Jerry Yang.

Bartz has made a number of changes since joining Yahoo, including shutting down underperforming websites and laying off 5 percent of the Sunnyvale, California company's staff.

But many investors continue to see a deal with Microsoft as Yahoo's best option, saying it will cut costs and create an online entity big enough to better compete with Google, the top search company in the United States.

The latest discussions involve a partnership in which Microsoft would handle search capabilities for Yahoo, while Yahoo could potentially handle online advertising for the two online sites.

According to Kara Swisher, co-executive editor of AllThingsDigital, a group of high-powered Microsoft online executives flew to Silicon Valley on Thursday to iron out remaining issues related to technology deployment. They included Senior Vice President of Online Audience Business Group Yusuf Mehdi, search head Satya Nadella, top digital executive Qi Lu.

Representatives for Microsoft and Yahoo declined to comment. Yahoo is scheduled to report quarterly results next Tuesday, and Microsoft on Thursday.

Microsoft withdrew its $47.5 billion offer to buy Yahoo in May 2008 after Yahoo's board said the price was too low. The software giant then offered to buy Yahoo's search advertising assets for $1 billion upfront, and guarantee $2.3 billion in annual revenue for five years, in a proposal backed by Icahn.

Google is the dominant player in the search market, with a 65 percent market share in June, according to comScore. Yahoo was second with 19.6 percent, while Microsoft was third with 8.4 percent. While Microsoft's share remains small, its new search engine Bing has won positive early reviews.

On Nasdaq, Yahoo finished Friday's regular trading session up 4 percent at $16.84 while Microsoft closed 0.6 percent lower at $24.29.

(Reporting by Alexei Oreskovic and Bill Rigby; Editing by Tiffany Wu and Richard)

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