UPDATE 3-Microsoft CEO willing to walk away from Yahoo bid

(Adds analyst comment in paragraphs 7 and 8, updates shares)

By Ian Simpson

SAN DONATO MILANESE, Italy, April 23 (Reuters) - Microsoft Corp (MSFT.O) is prepared to walk away from its $43.6 billion bid for Yahoo Inc (YHOO.O) if the two sides can't agree on a price, Chief Executive Steve Ballmer said on Wednesday.

Speaking at a technology conference near Milan, Ballmer said Yahoo's better-than-expected first-quarter results, reported on Tuesday, have not changed Microsoft's view of Yahoo's value.

Microsoft sees Yahoo as a way to compete with arch-rival Google Inc (GOOG.O) in the Internet search and advertising arena, but it has limits to what it is willing to pay to get a deal done.

"We're prepared to move forward without a merger with Yahoo," Ballmer said. "We think the best way to move forward quickly (and gain critical mass against Google) is to come together with Yahoo."

"Hopefully that works. But if it doesn't, we go forward," he said. "Time is money. We made (that) clear in the last letter we sent."

In that letter, Ballmer set a Saturday deadline for Yahoo's board to accept a deal with Microsoft or face a lower bid that Microsoft would take directly to Yahoo's shareholders. Yahoo's board of directors has said Microsoft's cash-and-stock offer significantly undervalues the company.

Analysts downplayed the possibility of Microsoft walking away from the deal.

"It is unlikely Microsoft will walk away, as the company has a strategic imperative to establish a more significant presence in Internet advertising," Marianne Wolk, analyst with Susquehanna Financial Group, wrote in a report on Wednesday.

The value of Microsoft's offer for Yahoo has fallen to $30.36 a share from $31.00 because of a decline in Microsoft shares. In order to regain the bid's full value, Microsoft's stock would have to rise to $32.60, the closing share price on Jan. 29, a day before Microsoft presented its unsolicited offer to Yahoo's board.

Shares of Microsoft were up 98 cents, or 3.24 percent, to $31.23 in afternoon Nasdaq trade. The company is to report its results for the March quarter on Thursday.

Yahoo shares were below Microsoft's offer, down 46 cents to $28.08 on the Nasdaq.

Asked whether Microsoft could make a bid for Google, Ballmer said in part that he did not think Google would be interested and that such a bid would raise regulatory issues. Yahoo and Microsoft rank second and third in Web search, respectively. Google is No. 1.

In the video game sector, Ballmer was asked if Microsoft plans to alter its Xbox prices in light of a cut in prices for its Xbox 360 video game console in Europe last month.

"We're pretty comfortable right now with Xbox pricing," he said. (Additional reporting by Dai Wakabayashi in San Francisco) (Reporting by Ian Simpson; Editing by Gerald E. McCormick and John Wallace)