Microsoft had earlier offered USD 47.5 billion which translated into USD 33 per share but Yahoo wanted USD 57 billion or USD 37 a share. Originally, the software giant had offered USD 44.6 billion or USD 31 a share but raised the offer as the negotiations proceeded.

Microsoft announced its decision to withdraw after talks between its Chief Executive Steven A Ballmer and Yahoo co-founder Jerry Yang in Seattle last morning failed to produce an agreement.

Microsoft had made an unsolicited bid to buy Yahoo so as to compete with Google search engine.

Ballmer in a letter to Yang pointed out that Microsoft had already raised its bid by about USD 5 billion and despite its best efforts, Yahoo has not ‘moved towards accepting our offer’.

"After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," said Ballmer.

"Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition for Microsoft," he wrote.

"We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo and the market as a whole," Ballmer said in the letter posted on the Microsoft website.

No immediate comment was available from Yahoo.