UPDATE 1-Microsoft, Yahoo agree on ad partnership - source

* Ad deal to be announced in 24 hours - source

* Microsoft won't pay Yahoo an upfront fee - source

* Deal focuses on revenue sharing - source

* Yahoo shares rise 1.6 pct, Microsoft shares flat

SEATTLE, July 28 (Reuters) - Microsoft Corp (MSFT.O) and Yahoo Inc (YHOO.O) have agreed to an online search and advertising partnership that will be announced within 24 hours, a source familiar with the situation said on Thursday.

Microsoft will not pay an upfront fee to Yahoo, and the focus of the deal is on sharing revenue between the two companies, said the source, who did not want to be identified because a formal announcement has not been made.

The news was first reported by the AllThingsDigital blog.

Microsoft and Yahoo declined comment. The two companies have talked for months about cooperating in the online advertising market, dominated by Google Inc (GOOG.O).

Microsoft tried to buy Yahoo last year but its $47.5 billion bid was rebuffed and Yahoo's attempt to seal a search advertising deal with Google Inc (GOOG.O) fell apart under regulatory scrutiny.

Shares of Yahoo rose 1.6 percent in after-hours trading to $17.50 while shares of Microsoft were roughly flat at $23.45, compared with their close of $23.47. (Reporting by Bill Rigby and Alexei Oreskovic, writing by Tiffany Wu; Editing by Steve Orlofsky)