Time Warner is in discussions with Microsoft about its America Online Internet division, sources close to the media giant said on Thursday.

The source partly confirmed a New York Post report on the discussions, but said the newspaper's portrayal that the talks were over a sale of a stake in AOL was "hyped."

"Discussions have occurred for some time," the source indicated, on "how AOL could be better leveraged."

The Post, citing two unnamed sources familiar with the matter, characterised the rumblings as "advanced discussions" and said Microsoft would combine a stake in AOL with MSN if a deal were struck.

The Wall Street Journal meanwhile reported there were talks between Microsoft and Time Warner on taking an AOL stake as part of a broader discussion about the two companies working together.

Citing people familiar with the matter, the Journal said one key point is whether AOL would switch to using Microsoft's search engine. AOL currently uses Google's search technology and was Google's single largest source of revenue last year, according to the Journal.

Analysts said that, while unconfirmed, a tie-up between the two giants wouldn't be inconceivable.

"I think it makes some sense; it's just consolidation like anything else," said Garban Institutional Equities analyst Richard Williams. "You take two weaker players and combine them for strength."

Microsoft is the world's largest software group but has failed to become a major player with its MSN Internet service. AOL is a longtime market leader in Internet but has been losing customers rapidly amid a switch to high-speed services.

At Deutsche Bank, analyst Todd Raker commented in a research bulletin that he had "no reason to doubt this report."

"The timing of the story is interesting" from Time Warner's standpoint, said Ben Silverman, telecom analyst at FindProfit. "We believe the story was probably floated in an effort to prove to Wall Street that the company can unlock shareholder value without being forced to."

Silverman added, however, that anything to help boost Time Warner's flagging stock is a welcome idea. AOL, he said, is a "dinosaur," a dial-up business in a world that is increasingly turning to broadband.

"The selling point was always that it was simple, but now, people have all ages have become attuned to using the Internet."