Yahoo has insisted the possibility of any deal between it and Microsoft has been scotched. Instead the search engine firm will partner with Google, its main competitor in the search market.

Yahoo will run ads supplied by Google alongside its own search results and on some of its web properties in the US and Canada. Yahoo will also be able to run ads with other providers as part of the non-exclusive agreement.

Microsoft had originally sought to acquire Yahoo but was unable to agree on a price - much the chargrin of some Yahoo shareholders. Nevertheless, talks between the two firms continued, with Microsoft exploring the option of a partial deal, which could have seen it acquire Yahoo's search business.

“Such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders,” said Yahoo.

The deal with Google should signal that a deal with Microsoft is off the table. Nevertheless, some market watchers believe that Microsoft will still ultimately acquire Yahoo: Microsoft's best bet of forging a compelling alternative in search to Google is to buy Yahoo, and Yahoo's bosses are under tremendous pressure to do a deal.

Yahoo said it expects the online advertising industry to grow to $75bn (£38bn) by 2010, when it was $40bn (£20bn) in 2007.

Back in April Yahoo had run a limited test of AdWords beside its search results.