UPDATE 1-Yahoo CEO says instinct is to keep search-source

(Changes sourcing, adds shares)

NEW YORK, Jan 15 (Reuters) - Yahoo Inc's YHOO.O new chief executive, Carol Bartz, told employees on Wednesday her gut instinct is to hang on to the company's search business, according to a person familiar with the company.

But Bartz also told staff she needs to better understand the pros and cons involved in selling the business. Bartz said her first instinct was to ask why the company would need to sell the search business.

Yahoo shares fell more than 6 percent in early trading.

The person said Bartz told employees she was expecting to have a conversation with Microsoft Corp MSFT.O CEO Steve Ballmer. Dow Jones newswire quoted a Yahoo source as saying Bartz spoke with Ballmer in the last 24 hours.

Bartz’s appointment, which was confirmed on Tuesday, paves the way for the Internet company to finally make decisions on its big issues, including a sale or search deal with Microsoft, several analysts said on Wednesday.

Under previous CEO and co-founder Jerry Yang, Yahoo rejected a $47.5 billion buyout offer from Microsoft nearly a year ago. Yang, who then saw an alternative Web search advertising partnership with Google Inc GOOG.O fall apart under U.S. antitrust scrutiny, agreed to step down in November.

Yahoo’s shares were down 80 cents at $11.60 on Nasdaq. (Reporting by Yinka Adegoke in New York and Ratul Ray Chaudhuri in Bangalore; editing by Maureen Bavdek)