YAHOO POSITIONED itself for the endgame in its battle with Microsoft by yesterday issuing its strongest rejection to date of its rival's $42 billion takeover offer.

However, analysts said the rhetoric from both sides suggested a negotiated settlement might happen, with Microsoft offering a deal worth more than its initial $31 a share.

Yahoo's swift response to Microsoft's move to set a deadline on Saturday of three weeks to conclude an agreement came in the form of a "Dear Steve" letter to Steve Ballmer, Microsoft's chief executive, from his Yahoo counterpart, Jerry Yang, and Roy Bostock, chairman of the board.

It said Microsoft was still substantially undervaluing Yahoo, whose board had received significant support from shareholders. It said they were impressed by projected revenues in a three-year financial and strategic plan unveiled last month.

"This plan has received positive feedback from our stockholders, further strengthening the view that Yahoo is worth well more as a standalone company than the value offered in your proposal, and would be even more valuable to Microsoft," it said.

Yahoo confirmed in the letter for the first time that informal meetings between the two sides had been taking place and, in a personal jibe, told Mr Ballmer that he could have speeded up the negotiation process. "Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit."

It also said Yahoo's concerns had not been addressed about the "thorough regulatory review in multiple jurisdictions" if a deal was agreed. It added that Microsoft's "threat" to launch a tender offer and proxy contest to unseat the board was counterproductive.

It concluded by repeating that the board was open to all alternatives, including "a transaction with Microsoft if it represents a price that fully recognises the value of Yahoo".

- (Financial Times service)