-By Brian Morrissey

NEW YORK The Microsoft-Yahoo! saga will continue, albeit in a different form.
 
Three weeks after walking away from negotiations to buy Yahoo! for about $44 billion, Microsoft and Yahoo! have restarted talks on a deal that would amount to less than a full purchase.
 
"Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties," Microsoft said in a statement released Sunday night.
 
The most likely format of such a deal would be Microsoft and Yahoo! combining their search businesses in an effort to better compete against Google, which dominates the category. Such a plan would bypass the messy integration of Yahoo! and MSN Web properties and communication services, such as e-mail, mapping and instant messaging.
 
The agreement would head off a deal allowing Google to take over part of Yahoo!'s search business -- an agreement that would likely raise regulatory concerns because it would leave Google with a dominant position in the market. It might also mollify angry Yahoo! shareholders who favored an acquisition by Microsoft. (Activist investor Carl Icahn last week released an alternative slate of Yahoo! directors he plans to introduce at Yahoo!'s annual meeting next month.)
 
"Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time," Yahoo! said in a statement. "Yahoo! and its board of directors continue to consider a number of value maximizing strategic alternatives for Yahoo!, and we remain open to pursuing any transaction which is in the best interest of our stockholders."
 
Yet a Microsoft-Yahoo! deal, depending on how it is structured, would undercut a key differentiation Yahoo! has in the market: a leading display ad business and competitive search offering. Yahoo! has long championed the synergies between display and search advertising. A year ago, it combined its search and display sales teams in an effort to better sell integrated packages to marketers.
 
The activity comes as Microsoft prepares to welcome hundreds of advertisers and agencies to its Redmond, Wash., campus. Kevin Johnson, president of the company's platforms and services unit, wrote an e-mail to employees in advance of the meeting. Johnson does not mention Yahoo! in the letter, reprinted by AllThingsD.com, and instead refers to making "small, targeted acquisitions." He does promise Microsoft will continue its effort to compete effectively with Google.
 
"We will disclose some elements of our plans with this week's release of search and sharpen our focus on user experience and business model innovation," he writes. "The work we have done over the last four years on search has established a solid foundation to build upon."