Oct. 30 (Bloomberg) -- Google Inc., reluctant to accept restrictions to avert a U.S. government antitrust lawsuit challenging its proposed Internet-search advertising venture with Yahoo! Inc., is considering abandoning the deal, people say.

A collapse of the planned venture between the two biggest online advertising companies would deprive Yahoo of as much as $450 million in operating cash flow over a year. Microsoft Corp., which offered as much as $47.5 billion to buy Yahoo earlier this year, may renew its interest in Yahoo if the deal collapses.

Google is pondering pulling out of the agreement with Yahoo because it doesn't want to accept conditions the government may require to avoid harm to competition in the market for online advertising based on Internet searches, said people familiar with the matter.

Adam Kovacevich, a Google spokesman, declined to comment, saying ``we are still talking'' with the Justice Department. Yahoo spokeswoman Tracy Schmaler said in an e-mailed statement that ``discussions are ongoing'' with the government.

``We believe strongly that this agreement will strengthen Yahoo's competitive position in online advertising and will help to drive a more robust, higher quality Yahoo marketplace for our advertisers, publishers and users,'' Schmaler said.

Earlier this month, Yahoo and Google said they had agreed to a ``brief'' delay in the start of the venture to give U.S. antitrust enforcers more time to study it.

The people said Google must decide whether the joint venture still would make sense if, for instance, the company agreed to limit the number of ads that it places on the Yahoo site.

Opt Out

Another possible condition might be to give advertisers the ability to opt out of the ad-sharing if they don't want to bid in an auction for the right to place ads on Google and Yahoo Internet search pages, the people said.

The Justice Department has been collecting sworn statements to prepare for filing a lawsuit seeking to block the venture if no agreement on conditions is reached, said the people.

Yahoo, based in Sunnyvale, California, announced the deal in June after fending off a takeover offer from Microsoft. Advertisers and Microsoft, the world's largest software maker, have complained that a deal between the two companies would hurt competition and raise prices for marketing.

Google, based in Mountain View, California, handled 63 percent of U.S. queries last month, according to research firm ComScore Inc. Yahoo ranked second with 20 percent, followed by Microsoft with 8.5 percent.

Close the Gap

Redmond, Washington-based Microsoft sought a takeover of Yahoo to close the gap with Google in Internet advertising. Microsoft walked away from the bid in May after Yahoo asked for a higher price. Microsoft said Oct. 16 that a deal with Yahoo may still make sense for shareholders of both companies.

The online ad market is expected to grow 17 percent this year to $26.2 billion, according to EMarketer Inc.

Yahoo has said its agreement with Google would cover sites in the U.S. and Canada. The partnership isn't exclusive, meaning that other companies in addition to Yahoo and Google would be able to sell ads to appear on Yahoo's pages.

To contact the reporters on this story: Matthew Newman in Brussels at Mnewman6@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net

Last Updated: October 30, 2008 20:43 EDT