By Michele Gershberg and Anupreeta Das

June 13, Reuters

NEW YORK/SAN FRANCISCO (Reuters) - Yahoo Inc and Microsoft Corp ended talks as the Web pioneer agreed to let archrival Google Inc sell search ads on its site, the companies said on Thursday.

Separate statements from Microsoft and Yahoo signaled a more permanent rift between the two after months of on-again, off-again talks. It also heightened pressure on Yahoo to outline an alternative strategy. Yahoo shares fell 10 percent.

Yahoo said it had agreed to let Google put search ads on its site in what it called an $800 million annual revenue opportunity that would boost cash flow by $250 million to $450 million in the first 12 months.

Yahoo's ads and Google's would be pitted against each other in an auction style process that could make a deal easier to pass regulatory approval.

"Yahoo is being a reseller of Google whenever it makes sense and that is likely to be a lot of the time given how much more effective Google Web search ads have proven to be," Global Crown Capital analyst Martin Pyykkonen said.

The deal is expected to face a major antitrust review given the rising power of Google, and Sen. Herb Kohl, a Wisconsin Democrat and chairman of a U.S. Senate antitrust subcommittee, said he would investigate the deal.

Microsoft had sought a tie-up with Yahoo for more than a year and by early May had offered up to $47.5 billion, or $33 per share, to buy the Internet company.

Its latest offer included buying Yahoo's search business and paying $35 per share for a 16 percent stake in Yahoo, said two people briefed on the matter but not authorized to speak publicly about it.

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photo: A man runs past the headquarters of Yahoo Inc. in Sunnyvale, California May 5, 2008 (REUTERS/Robert Galbraith)