Google may scrap Yahoo deal - sources

By Diane Bartz

WASHINGTON, Oct 31 (Reuters) - Google Inc (GOOG.O) may decide to scrap its proposed partnership with Yahoo Inc (YHOO.O) rather than accept government-imposed antitrust restrictions on it, according to two sources familiar with the companies' discussions.

"Are they more serious about walking away? Yes. Have they decided? I'm not sure," one source told Reuters on Friday.

"Yahoo wants the deal, and they're willing to have Google sign anything at the Justice Department to have them do it," said the source.

A second source said that Google and Yahoo, Nos. 1 and 2 in the Internet search market, could announce as early as Friday that the deal had fallen apart.

Google and Yahoo representatives could not be immediately reached for comment.

Google and Yahoo delayed implementing the partnership announced in June to allow the U.S. Justice Department to scrutinize it for antitrust issues. Between them, Google and Yahoo had more than 80 percent of the web search market in August, according to comScore Inc.

The deal, which would allow Google to sell advertising for some of Yahoo's online advertising space, has drawn fierce criticism from advertisers, who fear higher prices.

Part of the impetus of Google's walking away could be Yahoo's talks with Time Warner Inc (TWX.N) about buying the content and advertising operations of its AOL unit. Google initially struck the deal with Yahoo as a way to fend off Microsoft Corp's (MSFT.O) unsolicited bid.

Yahoo and AOL are conducting due diligence to see what a combined company would look like, another source previously told Reuters.

By collecting the revenue from placing Google ads along its search results, Yahoo's cash flow could grow by $250 million to $450 million in the first year of the deal, the companies had said in June.

The deal has since been mired in the regulatory process. In September, the Justice Department hired Sandy Litvack, its former antitrust chief and Walt Disney Co's (DIS.N) former vice chairman, to consult on its probe of the search deal. (Reporting by Diane Bartz, editing by Gerald E. McCormick)