Microsoft almost bought Yahoo for $47.5 billion last year, but the move was scuttled at the last minute by Yahoo co-founder and chief executive Jerry Yang, who later resigned following widespread criticism.

Microsoft has since refused to revive the buyout offer, but Yang's successor, Carol Bartz, confirmed in May that the two companies were holding talks on search collaboration.

The agreement would come just weeks after Microsoft launched its new search engine, Bing, which has been widely praised as a worthy competitor to Google.