May 2 (Bloomberg) -- Microsoft Corp. Chief Executive Officer Steve Ballmer may be running out of time to clinch his proposed purchase of Yahoo! Inc. as the Internet company forges tighter ties with Google Inc.

Yahoo may agree to use Google's Web advertising software within a week, the Wall Street Journal said yesterday, citing people familiar with the matter. The decision would build on an experimental program the companies ran last month.

After three months of pressing Yahoo to give up looking at alternatives and agree to a deal with Microsoft, Ballmer faces a potential setback. An accord with Google may spur Yahoo's sales and give it a better chance of staying independent, pressuring Microsoft to raise its $44.6 billion bid.

``The board and management of Yahoo are trying to retain independence at all costs,'' said Laura Martin, an analyst at New York-based Soleil Securities Corp. who has a ``hold'' rating on Yahoo shares.

Ballmer said yesterday he would walk away from the purchase before he overpays for Yahoo, the Sunnyvale, California-based owner of the second-most popular Internet search engine.

``I know exactly what I think Yahoo is worth to me, exactly,'' Ballmer said in a meeting with employees, according to remarks provided by spokesman Frank Shaw. ``I won't go a dime above, and I will go to what I think it's worth if that gets the deal done.''

Yahoo spokeswoman Tracy Schmaler and Google spokesman Adam Kovacevich declined to comment. Shaw didn't return a call late yesterday.

Challenging Google

Yahoo has repeatedly turned down the $31-a-share acquisition bid since Microsoft first made the offer Jan. 31. Microsoft, the world's biggest software maker, would use the takeover to bolster competition with Google, the leader in the $41 billion online advertising market.

Jerry Yang, Yahoo's CEO, has said the offer is too low. Ballmer, who gave the company until April 26 to agree to a deal, let the deadline pass without taking action.

Redmond, Washington-based Microsoft may make a friendly deal with Yahoo, start a proxy fight to replace Yahoo's board or abandon the bid, Ballmer said at the meeting. The company will make an announcement in ``very short order,'' he said.

Microsoft was leaning toward making a hostile bid as of last night, the Wall Street Journal reported, citing people familiar with the matter.

``Not getting this done is putting a substantial amount of pressure on him,'' said Rob Enderle, president of the research firm Enderle Group in San Jose, California.

Google's Plan

Yahoo declined 60 cents to $26.81 yesterday in Nasdaq Stock Market trading. The shares have gained 15 percent this year. Microsoft rose 88 cents to $29.40, while Google climbed $18.79 to $593.08. Since Jan. 31, Microsoft's stock has fallen, valuing the deal at $29.48 at yesterday's closing price.

Google may be using its Yahoo partnership to delay the deal, Enderle said.

``Google wants it to go as long as possible,'' he said. ``The longer this goes on, the happier Google is.''

Yahoo said last month that it would test displaying ads sold by Google next to Internet search results. The trial was limited to 3 percent of search queries and would last as long as two weeks, the company said.

Google, Yahoo and Microsoft sell text links that appear next to search results, charging advertisers when they are clicked. Google generates more revenue from each search query, so a partnership may boost Yahoo's revenue.

Antitrust Questions?

Yahoo and Google may strike a nonexclusive partnership, meaning that the system could display ads from competitors, including Microsoft's, the Journal said. That approach is designed to keep antitrust authorities from blocking the deal, the newspaper said.

The U.S. Justice Department is reviewing the initial test, Mountain View, California-based Google said last month. The U.S. Senate Judiciary Committee would examine any formal partnership between Google and Yahoo, Chairman Herb Kohl, a Wisconsin Democrat, said last month.

``Regulators will not allow this,'' Soleil's Martin said. ``It would put all of Internet advertising into the hands of Google, the predominant search marketer on the Web.''

Microsoft can still build an Internet advertising business without buying Yahoo, Ballmer told the Journal yesterday in an interview that ran in a separate story. Ballmer declined to say whether Microsoft plans to mount a hostile takeover or walk away, the Journal reported. He also declined to comment on when a decision will be announced, the newspaper said.

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net; Jonathan Thaw in San Francisco at jthaw@bloomberg.net

Last Updated: May 2, 2008 00:40 EDT