Microsoft said Saturday that Yahoo must accept its buyout offer within three weeks or face a hostile proxy battle. The company also said it would lower its offer for the Internet giant if it's forced to go the proxy route.

"It has now been more than two months since we made our proposal to acquire Yahoo at a 62% premium to its closing price on Jan. 31, 2008," Microsoft CEO Steve Ballmer said in a letter to Yahoo's board.

"Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy," Ballmer said in the letter, which Microsoft posted on its Web site Saturday.

"Our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers," said Ballmer.

Ballmer chastised Yahoo's board for its inaction, noting that to date "there has been no meaningful negotiation to conclude an agreement."

Ballmer threatened the board with a proxy battle if the two companies can't reach a deal in the near future.

"If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo Board," Ballmer wrote.

If that happens, Ballmer said Microsoft would lower its $31 per share bid.

"If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," said Ballmer.

To win a proxy fight, Microsoft would have to convince Yahoo shareholders to vote for a new board of directors that would be friendly to the transaction at Yahoo's next annual meeting -- most likely in May.

Various estimates put the cost of directly soliciting Yahoo shareholders, and associated legal fees, at between $20 million and $30 million.

Microsoft made a public offer on Feb. 1 to buy out Yahoo for $31 per share. At the time, the deal was worth a total of about $41 billion. Yahoo has to date rejected the offer.