July 17 (Bloomberg) -- Microsoft Corp. and Yahoo! Inc. are close to signing a partnership to collaborate on Internet-search technology and advertising, a bid to challenge Google Inc., two people familiar with the matter said.

The two companies, in talks for the past several months, may reach an agreement as soon as next week, although the following week is more likely, said one person, who declined to be identified because the talks are private.

While Microsoft and Yahoo are closer to reaching a deal than they have been all year, the negotiations may still fall apart, the person said. The companies are seeking ways to compete with Google, which controlled about 65 percent of the U.S. Web search market in June, according to research firm ComScore Inc. Yahoo ranked second with 19.6 percent and Microsoft was third with 8.4 percent.

“This is the only thing they can do to address Google’s dominance,” said Jack Neele, who helps oversee $150 billion at Robeco NV in Rotterdam, including Google and Yahoo shares. “Together they can offer big advertisers a viable alternative to Google.”

Adam Sohn, a spokesman for Redmond, Washington-based Microsoft, declined to comment.

“Yahoo is committed to delivering wow experiences to our users and continue to explore innovative ways to do so,” May Petry, a spokeswoman for Sunnyvale, California-based Yahoo, said in an e-mail. “Beyond this, we have nothing to announce and do not comment on rumor or speculation.”

Bing Effort

Microsoft fell 15 cents to $24.29 in Nasdaq Stock Market trading at 4 p.m. New York time, while Yahoo gained 65 cents, or 4 percent, to $16.84. Google, based in Mountain View, California, dropped $12.35, or 2.8 percent, to $430.25 after reporting slowing revenue growth yesterday.

The talks were reported yesterday in the Wall Street Journal’s All Things D blog.

Yahoo Chief Executive Officer Carol Bartz confirmed in May that the companies were holding discussions. Microsoft CEO Steve Ballmer has said repeatedly since last year that Microsoft would be interested in a partnership with Yahoo. Microsoft, the world’s largest software maker, abandoned a $47.5 billion takeover bid for Yahoo last year.

Last month, Microsoft released its Bing search engine to try and reverse five years of market-share losses to Google. Microsoft’s share of the U.S. search market rose last month from 8 percent in May, according to Reston, Virginia-based ComScore. Google’s share was unchanged, while Yahoo’s dropped half a percentage point.

Microsoft’s market-share gain may increase the probability of a partnership with Yahoo, Ben Schachter, an analyst at Broadpoint AmTech Inc. in San Francisco, said in a note this week. The improvement may encourage Microsoft to believe that it can compete with Google, he said. Microsoft’s share gain was the biggest since a year ago.

“Separately they’re only fighting each other, instead of winning from Google,” Neele said. “They’ve got to do something together.”

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: July 17, 2009 16:14 EDT