Yahoo is in talks with Time Warner on a deal to combine internet operations with AOL, while News Corp. is in talks with Microsoft to jointly bid for Yahoo, the Wall Street Journal reported Wednesday.

The possible deal between Yahoo and AOL is a bid to thwart Microsoft's bid for Yahoo. Yahoo plans to present shareholders with a three-fold plan to move forward without Microsoft. The Yahoo plan would also include a multi-billion dollar stock repurchase as well as an advertising tie-up with Google, the report said.

A Yahoo-AOL deal would involve Time Warner folding AOL into Yahoo and making a cash investment in return for about 20 per cent of the combined company, the Wall Street Journal said. The deal would be valued at around $10 billion, and would not include AOL's dial-up internet access business. Yahoo would use cash from the Time Warner deal to buy back several billions of dollars worth of its own stock.

Time Warner is under pressure to find a strategy for AOL because it has lost a lot of value since their merger in 2000, the report says. There is still a lot of work to do before a deal is reached, the paper reported.

Microsoft has already offered Yahoo shareholders a combined cash and stock deal valued at $42 billion, and has stated several times that it will not raise its bid.

The Wall Street Journal reported, however, that News Corp. may join Microsoft in the bid for Yahoo, although the newspaper did not say how much the offer might increase nor how the two companies would split ownership of Yahoo.

In related news, Yahoo also announced a two week experiment with Google in which Yahoo will test displaying Google search ads in a small number of its search engine queries.

The test will be limited to up to 3 per cent of Yahoo search queries in the US, it is specifically for Google's AdSense for Search service. In other words, Yahoo would be acting as one of the publishers that carry pay-per-click text ads from Google. The ads will appear only in

Yahoo noted that "the testing does not necessarily mean that Yahoo will join the AdSense for Search program or that any further commercial relationship with Google will result." Yahoo will not comment on the nature or timing of any potential relationship with Google.