GOOGLE HAS abandoned its search advertising partnership with Yahoo in the face of an antitrust lawsuit aimed at blocking the deal.

The US justice department had been reviewing the agreement, announced in June, and said yesterday it had informed both companies that it would file a suit to prevent its implementation.

The deal meant more to Yahoo and its embattled management team than Google. In a statement, Yahoo said it was "disappointed that Google has elected to withdraw from the agreement rather than defend it in court".

Yahoo had been seeking to placate shareholders dissatisfied with its performance with the promise of significant revenues from the deal, which is in addition to merger talks with Time Warner for its AOL division.

With the Nasdaq down 3 per cent in midday trading, Google shares were off 4.75 per cent, while Yahoo shares gained 6.3 per cent to $14.19 on speculation that Microsoft would now return with a takeover offer.

"The stock is up because people are thinking: it's not Google, it's not AOL, it's going to be Microsoft," said Scott Kessler, IT analyst at Standard Poor's Equity Research. "I think that's reasonable, given the circumstances, for people to expect some kind of partnership between Microsoft and Yahoo as good for both companies and potentially inevitable, to some extent."

Yahoo and Google began an experiment of placing Google ads within some of Yahoo's search results in April.

The alliance was seen as an attempt by the groups to present an alternative to the Microsoft offer for Yahoo. Microsoft withdrew a $33-per-share offer, worth $47.5 billion, in May.

Google and Yahoo announced their search advertising agreement the following month. Yahoo described it as an $800 million annual revenue opportunity that would generate $250-$450 million in incremental operating cash flow. The Silicon Valley company said yesterday it had proposed revisions to the deal that addressed antitrust concerns. - ( Financial Timesservice)