YAHOO! Inc is close to an agreement to combine operations with Time Warner Inc's AOL unit in a bid to fend off Microsoft Corp's US$44.6 billion takeover offer, a source familiar with the situation said yesterday.

Yahoo! would gain control of AOL, receive an investment from Time Warner, and give up a 20-percent stake in the combined entity, the source told Bloomberg News. The investment would let Yahoo! buy back billions of dollars of its own stock, the source said.

Yahoo! chief executive officer Jerry Yang is racing to find alternatives to Microsoft's US$31-a-share bid as the prospect of a proxy battle looms. On Wednesday, Yahoo! said it would display some Web search advertising links sold by Google Inc, a move that may give Yahoo! more time to convince investors it can remain an independent company.

"This is a move toward an independent future, but investors will not be impressed," said Wim Zwanenburg, who helps oversee the equivalent of US$43 billion at Bank Degroof Group, including Microsoft shares. "This is going to be an enormous fight in which Microsoft will prevail."

Diana Wong, a spokeswoman for Sunnyvale, California-based Yahoo!, didn't return a call for comment. Time Warner spokesman Ed Adler declined to comment.

"There will be more rumble in the jungle," said Juergen Lukasser, who helps manage the equivalent of about US$20 billion as head of equities at Constantia Privatbank AG in Vienna. Constantia holds Microsoft shares, but no Yahoo! stock. "Microsoft will have to raise its bid."

The talks with AOL and Google, owner of the most-used Internet search engine, indicate that Yang, 39, is making progress two months after telling investors that the company is seeking alternatives to Microsoft's bid. Microsoft's offer was 62 percent higher than Yahoo!'s closing price the previous day.

"They're delay tactics," Laura Martin, an analyst at New York-based Soleil Securities Corp, said of Yahoo!'s actions. She rates Yahoo! shares "hold" and doesn't own any. "They're just going to irritate Microsoft and accelerate a proxy fight."

Separately, the New York Times reported that News Corp is in talks to join Microsoft's bid for Yahoo!, citing people involved in the discussions. The deal would combine Yahoo!, Microsoft's MSN and News Corp's MySpace, the newspaper said.

Microsoft spokesman Frank Shaw didn't return a call seeking comment. Teri Everett, a spokeswoman for New York-based News Corp, said the company doesn't comment on "speculation."

Yahoo!, owner of the most-visited US Website, rose 2 percent to the equivalent of US$28.32 in German trading yesterday from the close of US$27.77 on the Nasdaq Stock Market on Wednesday. After jumping 48 percent on February 1, the day after Microsoft's bid, the stock declined 2.1 percent before yesterday.

Time Warner, the world's largest media company, fell four cents to the equivalent of US$14.39 in Germany from US$14.43 in New York Stock Exchange composite trading on Wednesday. Before yesterday, shares of the New York-based company had declined 13 percent this year.

Microsoft fell two cents to the equivalent of US$28.87 in German trading from Wednesday's US close.

"Yahoo! is a very attractive company and going forward, I think they could benefit from cooperation with other Internet companies," said Yasuhiko Hirakawa, who manages US$80 billion of assets at DIAM Co in Tokyo, including Yahoo! shares. "Consolidation is definitely a trend for the Internet."

Microsoft CEO Steve Ballmer is pursuing Yahoo! to challenge Google's dominance of the US$41-billion online ad market. Ballmer, 52, said in a letter last Saturday that Yahoo! has three weeks to accept a deal or become the target of the company's first hostile takeover. Yahoo! responded to Microsoft's threat of a proxy fight by insisting on a higher price.