Microsoft set to raise Yahoo! bid to $46.2bn

Yahoo! shareholders are said to be holding out for an offer between $35 and $37 a share.

Mr Ballmer had earlier threatened to begin a proxy battle to remove Yahoo!'s board if the companies did not resolve their dispute by last weekend, but Saturday's deadline passed without any deal being reached, and Microsoft is yet to make its next move.

Microsoft's offer - which was valued at $44.6 billion when it was made public on February 1 is now worth $41.8 billion. Yahoo! has said that the offer "substantially unvalues" the company, though its chief executive Jerry Yang has said he is not opposed to a sale at a higher price.

Yesterday it emerged that Microsoft may be considering a 'middle ground' between walking away from its bid and going hostile, which would involve putting forward an alternative list of directors to replace the current Yahoo! board.

That raises the prospect that Microsoft could continue to circle Yahoo! without making its bid hostile until July 12 - the date by which Yahoo! must hold its next annual meeting under the laws of Delaware, the state where it is incorporated.

Holding off from a hostile approach would give Microsoft shares a chance to recover from their recent fall - potentially increasing the value of its offer for Yahoo!. Since the bid was announced, Microsoft shares have fallen by about 13 per cent to close at $28.52 yesterday.

But Mr Ballmer has also said he is prepared to walk away from the deal, indicating at a speech in Milan last week that he would be prepared to 'go it alone' against Google - the ultimate target of Microsoft's bid for Yahoo! - in the online advertising market.

Yahoo!, meanwhile, continues to explore options that would allow it to remain independent, including a possible tie up with AOL, the internet unit of Time Warner. Its shares have risen by 43 per cent, to $27.41, since Microsoft made its offer.

Analysts have suggested that Yahoo! shares would likely drop substantially if Microsoft abandons its bid.