May 29 (Bloomberg) -- Rupert Murdoch, chief executive officer of News Corp., predicted the U.S. economy will be dismal in the coming months.

``In the next 18 months, this country is in for a very hard time,'' Murdoch said last night at the D: All Things Digital conference in Carlsbad, California. ``For the most part, people are suffering terribly.''

Increasing gas prices are reverberating throughout the economy and unemployment will probably rise, he said. Murdoch, whose company owns the Wall Street Journal and Fox News, predicted Democratic candidates will probably win most of the races in the general election in November.

Democratic candidate Barack Obama is ``like a rock star,'' while Republican nominee John McCain is unpredictable and has spent too many years in Congress making compromises, said Murdoch, adding he hasn't decided which candidate he'll support.

The CEO said newspapers are going to ``deteriorate tremendously,'' which will give the Wall Street Journal the opportunity to pick up more affluent readers throughout the U.S.

Newspapers will have to lower their profit margins to 10 percent from 30 percent and publish stories people ``want to read'' rather than articles geared toward winning Pulitzer Prizes, he said.

Earlier at the conference, Yahoo! Inc. Chief Executive Officer Jerry Yang said Microsoft Corp. is still discussing potential partnerships with his company after walking away from a $47.5 billion takeover bid this month.

Microsoft, Yahoo

Microsoft, the world's biggest software maker, had sought a Yahoo acquisition to bolster its Internet unit, which trails Google Inc. in the $41 billion-a-year market for online ads. Google has the dominant Internet search engine, while Yahoo and Microsoft rank second and third. Microsoft dropped its bid May 3 after Yahoo demanded a higher price.

Murdoch was ``mystified'' that Yahoo turned down the offer, which he called generous. Google, described by Murdoch as ``the greatest company in America,'' could use its dominance in Internet searches and growing cash reserves to challenge Microsoft's monopoly of operating system software, he said.

``Google is so good; it's the best search engine by far,'' Murdoch said. ``You can see why Microsoft is worried.''

Yahoo has a huge job to try to maintain its market share, Murdoch said. Discussions to add News Corp.'s MySpace social network to the Yahoo portal didn't work out, he said.

$200 Million `Noise'

Billionaire Carl Icahn and other Yahoo investors have threatened to oust the company's directors if they don't make a deal with Microsoft. Yahoo's board shouldn't be worried because Icahn is just making ``noise'' that will earn him around $200 million, Murdoch said, eliciting laughter from the crowd.

Yahoo, based in Sunnyvale, California, fell 9 cents to $27.07 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have climbed 16 percent this year. Redmond, Washington- based Microsoft, down 20 percent this year, increased 13 cents to $28.31.

News Corp., based in New York, fell 25 cents to $18.94 in New York Stock Exchange composite trading. The Wall Street Journal hosted the conference.

To contact the reporter on this story: Peter J. Brennan in Carlsbad at pbrennan3@bloomberg.net

Last Updated: May 29, 2008 16:06 EDT