UPDATE 2-AOL to cut 700 jobs - internal memo

* AOL to cut 10 pct of jobs due to harsh advertising market

* Job cuts to be finalized by end of March

* AOL will not give pay rises for all employees in 2009
(Adds analyst comment, background on cuts, byline)

By Yinka Adegoke

NEW YORK, Jan 28 (Reuters) - Time Warner Inc's (TWX.N) AOL
will cut about 700 jobs, or 10 percent of its workforce, as it
copes with an advertising slump, in a move that could make the
slimmed-down company more attractive to possible merger partners
like Yahoo Inc (YHOO.O).

The Internet unit will also eliminate merit-pay increases
this year to help minimize layoffs, AOL Chief Executive Randy
Falco said in a memo circulated to employees on Wednesday. A
copy of the memo was obtained by Reuters.

Most of the job cuts will be made in the United States and
will be finalized by the end of March, he said. The rest will be
made abroad over the next several quarters.

Falco said the steps were a result of the deepening
recession. "Online marketers have tightened their ad buying
across the board, reducing their spend by hundreds of millions
of dollars," he said.

Time Warner has been in deal talks with Yahoo and Microsoft
Corp (MSFT.O) to find a way to combine AOL's advertising
business with either or both of those companies, aiming to gain
greater audience scale.

Earlier this month, Time Warner Chief Executive Jeffrey
Bewkes met with Microsoft CEO Steve Ballmer and Yahoo Chairman
Roy Bostock at Time Warner's New York headquarters.

The additional cost cuts at AOL could help combination talks
with potential partners as all sides seek ways to improve
operating efficiencies in an increasingly difficult online
advertising market.

But even as Bewkes explores an AOL deal, the Internet
pioneer is being revalued downwards because of the tough
economic environment. Last week Google Inc (GOOG.O) recorded a
$726 million writedown of its 5 percent stake in AOL.

The stake, which Google bought in 2005, had originally
valued AOL at around $20 billion. The writedown implies AOL is
now valued at around $5.5 billion.

WEAK ADVERTISING

Time Warner said earlier this month that AOL had
weaker-than-expected advertising sales in the fourth quarter,
forcing a profit warning by the media conglomerate, which also
owns cable news network CNN and Warner Bros movie studio.

UBS analyst Michael Morris said he is forecasting a 12
percent decline in AOL's fourth-quarter advertising sales.

"We expect advertising declines at AOL to continue through
all four quarters in 2009," said Morris in a note to clients.

Time Warner has previously said it will separate AOL's
dial-up Internet access business, leading to a possible sale of
that business.

Falco, who took the helm at AOL two years ago, said his
three-year turnaround plan was now focusing on three core
businesses: advertising with its Platform A business; publishing
with MediaGlow; and social media with People Networks, which
holds its Bebo social network and AIM messaging assets.

In its cost-cutting efforts, the company is reviewing
international operations and its global shared-services
functions and is considering consolidating some domestic
facilities as it moves corporate headquarters to New York from
its hometown of Dulles, Virginia.
(Reporting by Yinka Adegoke; editing by John Wallace and
Matthew Lewis)