Billionaire Time Warner shareholder Carl Icahn on Monday warned the media conglomerate's board against making a "disastrous" and "short-sighted" decision.

If Internet unit America Online agrees to an exclusive deal with search giant Google, its shareholders will hold the board responsible, Icahn warned.

The Wall Street Journal and others reported last week that Time Warner and Google have secretly reached a tentative agreement whereby Google would pay US$1 billion for a 5 percent stake in AOL, giving AOL a valuation of US$20 billion.

The deal with Google, whose stock rose from Friday's close of US$430.15 to as high as US$446.21 on Monday, would nudge Microsoft out of the way. Microsoft was reported to have been wooing Time Warner to get AOL's search business for many months and was on the verge of a deal before the surprise turn late last week, according to a person familiar with the negotiations who asked not to be identified.

Icahn, who directly and indirectly controls 3 percent of Time Warner shares, has been organising a proxy battle for control of the company and wants to split AOL off.

"Like all shareholders, I am not opposed to Time Warner entering into an AOL transaction that creates long-term value. However, I am deeply concerned that the Time Warner board may be on the verge of making a disastrous decision concerning an agreement with Google if this agreement would make it more difficult in any way or effectively preclude a merger or other type of transaction with companies such as (InterActiveCorp), eBay, Yahoo or Microsoft." Icahn wrote in an open letter to the Time Warner board of directors.

He cited a recent Goldman Sachs report that said eBay and InterActiveCorp would be the best partners to provide incremental benefits to AOL and that Microsoft's MSN and Google would be the worst.

"On the eve of a proxy contest, I believe it would be a blatant breach of fiduciary duty to enter into an agreement with Google that would either foreclose the possibility of entering into a transaction that would be more beneficial for Time Warner shareholders or make such a transaction more difficult to achieve," Icahn wrote. "The real risk for Time Warner shareholders is that a Google joint venture may be short-sighted in nature and may preclude any consideration of a broader set of alternatives that would better maximise value and ensure a bright future for AOL."

Representatives of Time Warner, AOL and Google did not immediately respond to requests for comment.

The deal would allow Google to retain its biggest customer, AOL, without having to pay too much of a premium.

"Clearly, it is in Google's best interest to hold onto its largest customer; on a gross basis, we believe AOL accounts for approximately US$600 million of '05 revenues, or 10 percent of the total, and on a net basis, it is probably closer to US$120 million, assuming an average 80 percent traffic acquisition cost rate," Merrill Lynch analyst Lauren Rich Fine wrote in a research report.

Google "appears to have secured AOL vs. a competing offer from Microsoft -- maintaining part of its scale advantage in the sector -- and the new partnership may give (Google) greater inroads into display advertising," Citigroup analyst Mark Mahaney wrote in a research note. "Google's "dependence on AOL is limited -- 2 percent or less of its net revenue -- we believe the reported deal would be a modest positive for Google."

Under the reported deal, AOL also would be able to sell additional ads for its search engine, also powered by Google, on top of ads provided by Google. In turn, Google could promote AOL Web sites among sponsored links in search results, The Wall Street Journal said, citing unidentified sources close to the deal.