The specifics of the proposed joint venture haven't been worked out, according to the person, who didn't want to be identified because the talks are considered confidential.
Both The Wall Street Journal and a prominent blog, TechCrunch, reported that News Corp. is interested in folding its popular online social network, MySpace.com, and other Internet assets into Yahoo - an idea that first came up last year. News Corp. owns The Wall Street Journal.
News Corp. and a private equity firm reportedly would buy significant stakes in Yahoo as part of a complex deal designed to boost the Sunnyvale-based company's market value above Microsoft's initial bid of $44.6 billion, or $31 per share.
A Yahoo spokesman said the company continues to "carefully and thoroughly" evaluate alternatives that will enrich its long-term shareholders. Yahoo's board reportedly is to meet again Thursday or Friday to consider the company's next move.
News Corp. spokeswoman Teri Everett declined to comment on the Yahoo talks.
Yahoo shares climbed 31 cents to $29.88 Wednesday while Microsoft shares gained 62 cents to $28.96 News Corp. shares slipped 10 cents to finish at $19.93.
Based on Microsoft's current market value, its cash-and-stock bid for Yahoo now stands at $29.50 per share, or about $41 billion.
Yahoo rejected Microsoft's offer Monday, insisting that its Internet franchise is worth more money. Microsoft has held firm so far, calling its original "full and fair" while threatening to launch a hostile takeover attempt.
"What's unclear now is whether Yahoo is just trying to get a higher offer or if the company really doesn't want to sell to Microsoft," said Peter Falvey, a technology investment banker with Revolution Partners.
Although News Corp. Chairman Rupert Murdoch unequivocally said during a conference call last week that his New York-based company isn't interested in an outright acquisition of Yahoo, he didn't rule out the possibility of a deal involving MySpace.
When asked whether he might renew the previous discussions with Yahoo about a MySpace alliance, Murdoch replied: "I think that day has passed, but you never know."
A News Corp. stake in Yahoo might hinge on whether the two sides can agree on how much MySpace is worth.
News Corp., which also owns the Fox television and movies studios in addition to its newspaper and Internet holdings, bought MySpace for $580 million in 2005. But the social network's value has soared as its audience swelled above 100 million users, creating a potential advertising gold mine.
Ironically, Murdoch and his lieutenants can point to a recent Microsoft deal to make a case that MySpace is worth more than $15 billion.
Facebook Inc., which owns the Internet's second largest social network behind MySpace, now arguably has a $15 billion market value, based on Microsoft's purchase late last year of a 1.6 percent stake for $240 million.
Despite MySpace's popularity, the Web site still hasn't established itself as an effective advertising vehicle. Internet search leader Google Inc. last month cited lackluster returns from its ad partnerships with MySpace and other social networks as one of its few disappointments during the fourth quarter.
Besides talking with News Corp., Yahoo also reportedly has explored an advertising partnership with Google, its biggest rival.
Reports of a possible merger with Time Warner Inc.'s AOL appears to be more rumor than fact, said the person familiar with News Corp.
negotiations.
Although Google probably could help elevate Yahoo's recently drooping profits, the alliance would likely face antitrust hurdles because the two companies operate the Web's two biggest ad networks and eliminating one would reduce competition.
If Yahoo is able to work out a deal with News Corp., analysts believe Microsoft will simply raise its offer because it needs the acquisition to counteract Google's dominance of the online ad market - a battleground that is rapidly reshaping the technology and media industries.
Analysts believe Microsoft is prepared to offer as much as $35 or $36 per share, if necessary, to get the Yahoo deal done.
"Buying Yahoo makes tremendous sense for Microsoft, more sense than any other company in the world," said Ken Marlin, a New York investment banker specializing in media and technology deals.
---
AP Business Writer Seth Sutel in New York contributed to this
story.
