Yahoo!, the internet portal that is the subject of a $44.6 billion hostile takeover by Microsoft, is reportedly close to outsourcing its search advertising business to its great rival Google.

Tests of the new arrangement, which would mean that Google will place the ads alongside search queries conducted by Yahoo! users, have yielded positive results, suggesting a wider roll-out may be imminent, according to the Wall Street Journal.

Some say that the mooted tie-up is merely a tactic on Yahoo!'s part to taunt Microsoft, given that in the UK, for instance, it would consolidate more than four fifths of the search advertising market in one place, which would likely give rise to anti-trust issues.

But others say it will give Yahoo! leverage in its bid to ward off Microsoft, or at least force the latter to raise its $31-a-share offer, given that according to some analysts Yahoo! is likely to raise its revenues by more than $1 billion a year as a result.

Google's system for placing ads alongside search results delivers significantly more revenue per query than Yahoo!'s. If Yahoo! outsourced that component of its operations, analysts say, it would be free to concentrate on its banner ad business, where it is in a stronger position.

The deal would not seriously hamper Microsoft's bid to acquire Yahoo!, which Google strongly opposes, however. Yahoo! would be free to pull out of the partnership assuming Microsoft's bid was successful, according to the Wall Street Journal report.

People familiar with the talks say the two companies have also pre-empted the potential regulatory problems, and have discussed the possibility that the deal might be limited to particular types of queries, or to certain regions.

Yahoo! and Google announced they were to begin tests of the new arrangement last week at the same time it was reported that Yahoo! was in talks with Time Warner about a potential 'white knight' deal to ward off Microsoft.

The talks with Time Warner apparently involve the possible merger of AOL with Yahoo! in a deal that would value AOL at about $10 billion. Yahoo! would receive cash from Time Warner in exchange for 20 per cent of the combined internet company.

Microsoft is itself said to be discussing the possibility of teaming up with Rupert Murdoch's News Corporation, parent company of The Times and Times Online, to bolster its chances of acquiring Yahoo!.