July 2 (Bloomberg) -- Yahoo! Inc., owner of the second-most popular search engine, climbed the most in almost two months in Nasdaq trading on optimism that Microsoft Corp. may revive attempts to take over the Internet company.

The shares gained 3.4 percent after the Wall Street Journal said Microsoft, the world's biggest software maker, approached media companies about trying to break up Yahoo. Microsoft talked with Time Warner Inc., News Corp. and others, the newspaper said, citing people familiar with the matter.

The report signals Microsoft Chief Executive Officer Steve Ballmer is unwilling to abandon a deal that would more than triple his company's share of U.S. Web searches, helping him take on leader Google Inc. A transaction also may appease Yahoo investor Carl Icahn, who sought to oust the Internet company's directors after talks on a combination collapsed.

``The board and the management of Yahoo are in a very precarious and weakened position,'' said Mike Holland, chairman of Holland & Co., which oversees more than $4 billion in assets, including shares of Redmond, Washington-based Microsoft. The deal to split Yahoo ``is more challenging, but also potentially more promising in terms of ultimate success.''

The Journal, in a separate report today citing people familiar with the matter, said Yahoo is talking to Time Warner about a possible combination as Microsoft weighs another bid.

Discussions aren't as serious this time as they were in April, when Time Warner first considered folding its AOL unit into Yahoo and taking a minority stake in the company, the Journal said, citing one person familiar with the situation. Yahoo spokeswoman Tracy Schmaler declined to comment.

New Arrangement?

Yahoo, based in Sunnyvale, California, climbed 68 cents to $20.88 at 4 p.m. New York time on the Nasdaq Stock Market, the biggest gain since May 13. Microsoft fell 99 cents, or 3.7 percent, to $25.88.

Microsoft isn't in any new negotiations for a deal with Yahoo, CNBC reported today, citing people familiar with the matter. Representatives at Microsoft, Yahoo, Time Warner and News Corp. declined to comment. Icahn's office didn't return a call seeking comment.

Under the discussions now taking place, Microsoft would buy Yahoo's search operations, the Journal said. Another company, such as Time Warner's AOL or News Corp.'s MySpace, would combine with the rest of Yahoo, the newspaper said. News Corp. owns the Wall Street Journal.

Walking Away

Microsoft representatives met with Icahn to encourage him in his proxy battle, the Journal said. The billionaire investor began an attempt to oust Yahoo's board in May, after Microsoft first walked away from a takeover of the whole company. Icahn accused Yahoo CEO Jerry Yang and his directors of sabotaging the deal. Yahoo's shareholder meeting is scheduled for Aug. 1.

``It is going to be very, very difficult for that board to retain the support of shareholders,'' said Gamco Investors Inc. associate portfolio manager Larry Haverty in Rye, New York. ``This movie needs to close. It's run way too long.''

Microsoft initially offered about $44.6 billion for Yahoo. The company later raised that to $47.5 billion to sway the board, only to walk away when Yahoo demanded more money. Ballmer later sought an alternative transaction short of a full takeover, taking aim at Yahoo's search business.

Yahoo ended those talks after Microsoft made a final proposal to buy $8 billion of Yahoo shares for $35 each and acquire the search business. The same day, Yahoo forged an agreement to allow Mountain View, California-based Google to sell some of the advertisements Yahoo runs alongside Internet search results.

`Post-Deal Regret'

Google accounted for almost two-thirds of U.S. Internet searches in May, according to Reston, Virginia-based research firm ComScore Inc. Microsoft came in a distant third, slipping to 8.5 percent from 9.1 percent a month earlier. Uniting with Yahoo would give the company almost a third of the market.

``A lot of people have post-deal regret that it didn't happen, and they're trying to cobble something together,'' said Jeffrey Lindsay, a Sanford C. Bernstein & Co. analyst in New York. He expects Yahoo shares to perform in line with the market and doesn't own any. ``There's a huge sense of a great opportunity having been lost.''

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net; Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: July 2, 2008 23:05 EDT