Friday's dramatic bounce in Yahoo's stock on reports of a deal with Microsoft -- later discredited, reflects the pressure facing the third- and second-largest internet companies as they struggle to gain market share from Google, according to analysts.

Behind Friday's flurry is the fact that Yahoo is the only meaningful acquisition Microsoft can make to significantly strengthen its internet business, said Ben Schachter, an analyst with UBS.

That's in part because promising internet advertising companies like DoubleClick have shown a clear preference for being bought by Google, rather than Microsoft or Yahoo, making it hard for those two to expand into areas not yet dominated by Google.

Last year, Microsoft sold $US2.3 billion ($AU2.8 billion) in internet advertising, compared to $US4.6 billion ($AU5.59 billion) for Yahoo and $US7.3 billion ($AU8.88 billion) for Google.

While Microsoft would prefer to create its own successes, it's not clear they can do that on the internet. "They are not getting any traction," Schachter said.

Microsoft and Yahoo have explored working together since Microsoft moved its advertising sales onto its own platform - and off of Yahoo's - in the spring of 2006. One idea, strongly rebuffed by Yahoo, was that Microsoft take an equity stake in Yahoo while simultaneously spinning off its internet division and folding it into Yahoo.

"My impartial advice to Microsoft is that you have no chance," Yahoo Chief Executive Terry Semel said last May after the proposal was leaked. Semel added that it would not be smart to sell "your right arm while keeping your left."

Insiders say Yahoo is still not interested in putting itself up for sale. While the company declined to comment on Friday's rumour rollercoaster, executives have repeatedly expressed confidence in Yahoo's efforts to succeed alone.

In an interview with the San Jose Mercury News last week, Semel said he is confident in Yahoo's strategy to sell advertising both on its own network of web sites and throughout the internet.

The strategy has included a wide-ranging advertising partnership with more than 260 newspapers, as well as with eBay and Viacom. Yahoo also purchased Right Media, an online advertising exchange that allows Yahoo to broker advertising sales between any advertiser and website, regardless of whether they are affiliated with Yahoo.

Most importantly, Yahoo redesigned its advertising software to be more competitive with Google. Codenamed "Panama," the system was launched in the United States at the end of March.

Some analysts have calculated that the effect of these changes will increase Yahoo's market value 35 per cent this year.

Friday's rollercoaster ride started with a New York Post report that Microsoft was ready to bid $US50 billion ($AU60.8 billion) for Yahoo. That news boosted the stock 18 per cent in mid-day trading on Friday. Yahoo closed at $30.98, up about 10 per cent, after a sell-off followed a Wall Street Journal reported the talks between the companies were no longer active.

"I think there are probably as many forces against doing this deal as it would be for it," said Glover Lawrence, an investment banker with McNamee Lawrence.