UPDATE 2-Yahoo, Google revise deal in hopes of approval-source

(Recasts with new sourcing; adds analyst comment)

WASHINGTON, Nov 3 (Reuters) - Internet search leaders Yahoo (YHOO.O) and Google (GOOG.O) have given the Justice Department a revised version of their search advertising partnership in hopes of winning antitrust approval, a source close to the discussions told Reuters.

The new plan cuts the agreement from 10 years to two years and limits the revenue that Yahoo can collect to 25 percent of its search revenue, the source said. The changes were earlier reported by the Wall Street Journal.

Another revision is that Google advertisers can ask not to be placed on Yahoo.

"We have been working with the Department of Justice regarding our agreement with Google and those discussions are ongoing," said Yahoo spokeswoman Tracy Schmaler in an e-mailed statement.

Google issued a similar statement. "We are not going to discuss the details of the process," spokesman Adam Kovacevich said in an e-mailed statement.

The deal, which was announced in June, is unpopular with most advertisers because Google and Yahoo dominate the U.S. Web search market. Google's market share widened to 63 percent in August, while Yahoo dropped to 19.6 percent and Microsoft slipped to 8.3 percent, according to comScore Inc.

The deal to share advertising has been widely seen as a effort to help Yahoo fend off Microsoft by bringing Yahoo an additional $800 million annually.

Mukul Krishna, digital media global director at consulting firm Frost and Sullivan, described the revised terms as "more of a Band-Aid than the extensive surgery that is needed" for Yahoo.

"This sweetens the deal to go through antitrust red flags and gives (Yahoo CEO) Jerry (Yang) some breathing space, but how much money it would add to Yahoo's top line would be very crucial," Krishna said. "And it doesn't answer the question, what after two years?"

While the Justice Department does not comment on pending merger matters, there had been hints that it planned to challenge the partnership -- particularly by hiring veteran litigator Sandy Litvack to work on the probe.

Litvack was the department's antitrust chief under U.S. President Jimmy Carter and Walt Disney Co's (DIS.N) former vice chairman. (Reporting by Diane Bartz and Anupreeta Das; editing by Carol Bishopric and Tim Dobbyn)