Some reports indicate that the deal calls for Microsoft to handle search queries, possibly through its new Bing "decision engine", on Yahoo sites as well as its own in exchange for upfront and ongoing payments. Yahoo would also reserve the right to continue to sell text-based search ads alongside some of the queries.
Microsoft and Yahoo have not commented on the reports.
Yahoo shares rose 1.29% in Tuesday trading, to close at $17.22. Microsoft shares gained 1.56%, to $23.47. Yahoo last week reported that Q2 revenues declined 13% year-over-year to $1.57 billion. Earnings per share increased 11% to $0.10 on net income of $141 million.
Yahoo in recent weeks has beefed up its search properties, either in an effort to become a stronger, standalone competitor or to better position itself for a partnership arrangement.
The company last week unveiled its new Front Doors homepage. It offers direct links to popular sites like Facebook, Twitter, Ebay, and others. The links can be added to a new "My Favorites" column that appears on the home page's left hand side.
Earlier this month, Yahoo introduced its news Search Pad feature. Still in beta testing, it gives users a platform on which they can create notes based on their search results, share the information with friends, family, or business associates, and save the results for future use.
Google presently controls about 65% of the U.S. search market, while Microsoft owns only about 8% of the market, according to the most recent numbers from ComScore. Yahoo, the number two player, held 20% of the market, as of May.
Despite Google's dominance, a pact between Yahoo and Microsoft would likely draw at least some level of regularly scrutiny.