UPDATE 9-Yahoo seeks AOL tie; Microsoft talks to News Corp

(Adds analyst comment seeing Microsoft as stronger offer)

By Eric Auchard and Anupreeta Das

SAN FRANCISCO/NEW YORK, April 9 (Reuters) - Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz), which was widely believed to be running out of alternatives to accepting Microsoft Corp's (MSFT.O: Quote, Profile, Research, Stock Buzz) takeover offer, has become a target of two warring camps of technology giants and their media allies, sources said on Wednesday.

News Corp (NWSa.N: Quote, Profile, Research, Stock Buzz) is considering joining Microsoft in a bid for Yahoo which would bring in News Corp's MySpace online social hangout and create a more formidable rival to Internet juggernaut Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz), newspaper reports said.

But Yahoo, which announced earlier on Wednesday it plans to test Google search ads alongside Yahoo Web search services, is closing in on a deal with Time Warner Inc (TWX.N: Quote, Profile, Research, Stock Buzz) with its AOL unit, several sources told Reuters.

The game of musical chairs among the titans of the Internet follows two years of on-again, off-again talks to strike industry-reshaping mergers among different configurations of the same players.

Google, unaccustomed to being backfooted by its rivals, is considered a secondary player unlikely to enter the merger bidding as its growing dominance in Web search and search-based advertising could be blocked by competition regulators.

Reports were sketchy on exactly how a Microsoft deal with News Corp might be structured, making it difficult for Wall Street analysts to say which combination might prove the superior offer. Several said Yahoo has regained some of the negotiating momentum it appeared to have lost with Microsoft.

But UBS analyst Benjamin Schachter said neither an AOL deal nor a reported plan by Yahoo to buy back a chunk of its shares had enough funding to satisfy shareholders clamoring for a deal worth at least Microsoft's current offer of $31 a share.