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Microsoft Corp and Yahoo Inc inked a 10-year Web search deal to challenge market leader Google Inc but stopped short of combining their display advertising businesses.

Microsoft Corp. and Yahoo! Inc. are getting closer to signing an Internet-search partnership to challenge market leader Google Inc., a person familiar with the matter said.

Microsoft could reach an alliance with Yahoo that could compete better with Google in online search advertising, according to media reports.

Faced with the prospect that Yahoo might give some of its search advertising business to Google, Microsoft recovered from its “we’ve moved on” tantrum and proposed combining its search ad business with that of Yahoo.
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Microsoft and Yahoo are holding talks on a possible search advertising agreement and the chief executives of the two companies have met to discuss the deal, media reported Friday.

The urgency in going forward on the deal comes as advances in search engine offerings come quickly. Yahoo on Thursday said on its Search Blog

Given the flurry of reports last summer about the Yahoo/Microsoft search deal, it would have been reasonable to assume that the two parties had actually completed their negotiations.

Yahoo Inc is considering developing new real-time search capabilities, even as it outsources its existing Internet search technology to Microsoft Corporation.

the benefits of that partnership might already be eroding as Yahoo's search share slips with each passing month.The Sunnyvale, Calif.-based Internet giant must stem its U.S. search-share loss to fully benefit from the deal