Yahoo shares closed trading up 9.9% at $30.98 after reports of a possible tie-up with Yahoo in the Wall Street Journal and the New York Post.

But Microsoft's shares fell by more than 1% on the news.

'Incompatible'

One analyst said a takeover of Yahoo was unlikely given the huge sums required but some form of co-operation in areas such as advertising was more conceivable.

On a possible takeover, Matt Rosoff, from IT research firm Directions on Microsoft, said: "I don't think it is going to happen."

The two firms' cultures were incompatible, Mr Rosoff added.

"I do not understand what Yahoo would get out of the deal, including that there are people there who don't want to work for Microsoft."

Microsoft and Yahoo currently trail Google in the multi-billion dollar web search market.

Google's recent $3.1bn acquisition of web advertising firm DoubleClick has increased the onus on Microsoft to improve its position in the online search market.

Yahoo has disappointed analysts with its performance in recent times, its profits falling 11% in the most recent quarterly period.

Yahoo recently installed a new software system it hopes will secure higher advertising sales, but it says the gain will not come until its second quarter.