Microsoft is still holding out hope that it can resurrect a deal with Yahoo!, leaving the door open for the new management of the search company to join forces with the software giant in the future.

In an interview with The Times, Kevin Turner, chief operating officer of Microsoft, extended an olive branch to Carol Bartz, the new chief executive of Yahoo!, making it clear that a smaller deal regarding a partnership on search functions was still part of Microsoft’s thinking.

“They have a new CEO, and she’s formulating her business plans,” Mr Turner said.

“We’ve certainly made her aware and the Yahoo! board aware that if they are ever interested in an opportunity to partner with them on search, we’d like to sit down and at least have the conversation. It has to make economic sense to both parties.”

Last year Yahoo!, under the leadership of Jerry Yang, rejected a deal with Microsoft, which offered $47.5 billion for the internet business.

However, in the aftermath, which included a shareholder revolt led by Carl Icahn, the billionaire investor, Mr Yang resigned as chief executive of Yahoo!, leading to fresh speculation that the deal between the two companies could still be salvaged.

Although a venture could still go ahead, Microsoft looks set to challenge Yahoo! and Google in the coming months.

It was revealed last week that Microsoft is conducting internal tests of a new online search service has been codenamed kumo.com, though the company did not provide details of any new features.

For years Microsoft has been struggling to catch up with Google, the runaway leader in the online search market.

In the US search market, Microsoft comes third with 8.5 per cent of all searches; trailing behind Google on 63 per cent and Yahoo!'s 21 per cent. Worldwide, Google’s lead is even bigger.

Mr Turner also said that Microsoft had not ruled out the possibility of making an iPhone-type product — a luxury smartphone to rival Apple’s product — but said that there were no plans to design or manufacture any such device in the near future.

Asked whether Microsoft was considering not only making the software for phones, as it does today, but follow Apple’s lead and make the device itself, he said: “Sure, we think about it, and, sure, its on the table.

"But that’s not our direction today. For now we’ll work with our partners. After all, we’re going to sell 22 million copies of Window’s Mobile this year.”

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