MaSSSoftech

By JESSICA E. VASCELLARO and NICK WINGFIELD

Yahoo Inc. and Microsoft Corp. are close to sealing an Internet-search partnership, said people familiar with the matter, ending a protracted dance and uniting the rivals against Google Inc.

Microsoft, which last year made a failed $47.5 billion takeover bid for Yahoo, would finally win what it wanted most from the Internet pioneer -- huge volumes of queries that run through Yahoo's search engine.

At the same time, Yahoo is expected to reap additional search-advertising business to expand its share of the market.

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Yahoo CEO Carol Bartz

The agreement, which could be disclosed as soon as Wednesday, includes Yahoo agreeing to use Microsoft's Bing search-engine technology on its own sites, these people say.

One person familiar with the matter said the Bing brand is expected to be used by Yahoo.

A deal between the two companies would immediately narrow the gap with Google.

According to Comscore, Microsoft and Yahoo combined accounted for less than half of Google's 65% share of searches in the U.S. market in June.

Microsoft handled 8.4% of searches that month and Yahoo accounted for just under 20%.

Internet users won't notice a dramatic difference on either Yahoo or Microsoft's sites, since the technology involved in the exchange operates behind the scenes.

Yahoo would continue to handle sales of the text ads that appear next to the search results for its own sites, as well as some Microsoft sites, said the people familiar with the matter.

These people said the deal would involve revenue-sharing from advertising sales. The two aren't expected to exchange hefty up-front payments.

The companies would argue any deal will eventually lead to better search results, in part by giving Microsoft more data to refine its search technology.

Yahoo may also argue that the pact will be a boon to Internet advertisers, helping them more easily reach people conducting searches via Yahoo and Microsoft.

The deal could make it simpler for advertisers to choose an alternative to Google as a vehicle for online-search advertising, said industry observers.

"They should be worried," Danny Sullivan, editor of SearchEngineLand.com, said of Google. "It's going to give Microsoft in one fell swoop a much bigger share of the search market."

Bryan Wiener, chief executive of digital advertising agency 360i, said the proposed deal would make Bing more attractive to advertisers who have been excluding it from their campaigns because its search traffic is relatively low.

Any deal would free up Yahoo to invest in new search ad-sales staff and technology, areas where, he said, it has trailed Google.

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Microsoft CEO Steve Ballmer

Still, Mr. Wiener said it remains unclear whether Yahoo and Microsoft will be able to greatly increase their current combined market share.

"The only thing that can increase that is product development and smart marketing and there is nothing in this deal per se that changes that landscape," Mr. Wiener said. With Google's commanding position, "as long as they focus on their customers, they are going to be fine."

A Google spokesman declined to comment.

Both companies have expressed concern that a deal that reduced the number of search competitors might be opposed by antitrust authorities, the people familiar with the talks said.

These people said Microsoft and Yahoo plan to argue that the deal would enhance competition by helping them provide a stronger alternative to Google.

A spokeswoman for the Justice Department declined to comment.

Continuing to sell search ads could reduce the cost savings that Yahoo could generate from selling its search-advertising business outright.

But it would help Yahoo maintain its relationships with advertisers who buy its other online advertising services, such as selling graphical ads on Web sites.

The deal comes as Microsoft has begun garnering positive buzz for its Internet search engine with the launch of Bing in early June.

But even with Bing, Microsoft Chief Executive Steve Ballmer made it clear in a recent interview that he still favored a deal with Yahoo to help accelerate Microsoft's search business and the creation of a more serious competitor to Google.

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com and Nick Wingfield at nick.wingfield@wsj.com