Yahoo simply said that an alternative Microsoft proposal to buy only its search business did not fit into its plan to grow search and display advertising.
Microsoft's offer for a minority stake was at a premium per share to its early May offer to buy the entire company for $47.5 billion, or $33 per share.
Microsoft, which said it was still open to an alternative deal, had hoped a Yahoo deal would accelerate its ability to capitalize on Web advertising growth and compete with Google, which is increasingly fighting for the same Internet audience.
Yahoo said on Thursday that Microsoft had made it clear in a meeting on June 8 that it was no longer interested in buying the company outright, even at the $33 per share price Microsoft had most recently proposed.
That may not appease Yahoo shareholders - including billionaire Carl Icahn - who have been pressuring Yahoo to reach a deal with Microsoft. Icahn has called for Chief Executive Jerry Yang to be ousted.
THE END?
Analysts said they did not expect that Yahoo and Microsoft would try another round of negotiations.
"It certainly seems to be the end," said Derek Brown, an analyst at Cantor Fitzgerald. "In their most recent discussions, they were talking about totally separate visions of both a deal and the future."
Microsoft is expected soon to be on the prowl for other acquisition targets because it has not given up its goal for online advertising.
"Microsoft will keep trying," said Morningstar analyst Toan Tran. "Yahoo is one of the most popular sites on the Web, and there is no one else with as much traffic. AOL may be one option, and it may not be as expensive."
Icahn, who has waged a proxy battle to remove Yahoo's board at its August 1 annual meeting, had urged Yahoo to secure a higher price from Microsoft. Icahn has said a partnership with Google should only be a second choice.
Icahn could not be reached for comment.
Yahoo shares sank as low as $22.50 on news of the talks failing and expectations of the Google deal. It was their lowest level since January 31, the day before Microsoft announced its offer for the company.
Yahoo shares fell $2.63 to $23.52 on Nasdaq. Google shares finished up $7.75 at $552.95, and Microsoft closed up $1.12 at $28.24.
