UPDATE 3-Yahoo rebuffs Microsoft, says open to better deal

(Adds analyst comment, more details from Yahoo letter)

By Franklin Paul

NEW YORK, April 7 (Reuters) - Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz), responding to a three-week deadline issued by Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) to accept its $42 billion takeover bid, again rejected the deal for undervaluing the Web pioneer.

In a defiant open letter to Microsoft Chief Executive Steve Ballmer on Monday, Yahoo said the software giant's threat of a proxy battle was counterproductive and Yahoo would only be open to a better deal.

"Our board's view of your proposal has not changed," said the letter, signed by Yahoo Chairman Roy Bostock and Chief Executive Jerry Yang. "We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders."

Ballmer on Saturday set a three-week deadline for Yahoo to agree to its cash-and-stock offer or risk seeing the bid lowered, citing a deteriorating economy and market for Internet stocks as well as a decline in Yahoo's share of the Web search and advertising business.

Yahoo countered that its business is in good shape and suggested the software giant should look to the value of its own enterprise.

"As a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal," Yahoo's letter said.

When Microsoft first announced its bid on Feb. 1, the deal valued Yahoo at $31 per share, or $44.6 billion in total, representing a 62 percent premium to Yahoo's market price.