Microsoft, the world's largest software maker, is reportedly poised to take its bid for Yahoo! hostile, with an announcement expected as early as today.

In an interview yesterday, Steve Ballmer, Microsoft's chief executive, declined to set out the company's position, but said that "with the right circumstances" the deal - now valued at about $42 billion - "will happen."

People familiar with the negotiations said, however, that the situation remained "fluid" and that Microsoft could still walk away from the deal. A spokeswoman for Microsoft refused to comment.

In a meeting with employees yesterday, Mr Ballmer said there were "three options" on the table, and that Microsoft would announce "in short order" which it would follow in its attempt to acquire Yahoo!, the struggling internet portal.

He said Microsoft's options were: completing a negotiated deal, walking away from the deal or pursuing a hostile takeover, which would likely involve a proxy fight to gain control of Yahoo!'s board at the company's annual shareholder meeting, which it must hold by July.

“I know exactly what I think Yahoo is worth to me,” Mr Ballmer said. “I won’t go a dime above, and I will go to what I think it’s worth if that gets the deal done.”

Yahoo! has rejected Microsoft's cash and shares offer, which was originally valued at $31 a share but was worth $29.48 at the close of market yesterday, saying it "substantially unvervalued" the company. Jerry Yang, Yahoo!'s chief executive, has meanwhile indicated that the company would be open to considering a higher offer.

This week it emerged that Microsoft may be willing to raise its bid to $33 a share, which would increase the value of the offer to $46.2 billion, based on 1.4 billion Yahoo! shares in issue. Yahoo! shareholders, meanwhile, are said to be holding out for an offer of between $35 and $37 a share

In an interview with The Wall Street Journal, Mr Ballmer said that Microsoft would be willing to 'go it alone' in the online advertising market without Yahoo! but that in that case, building a business that could compete with Google - the ultimate goal of the Yahoo! bid - "could take more time."

He said he felt Microsoft had strong technology but not the 'scale' to take on Google - a reference to the number of advertisers that Yahoo! has already signed up to its network.

Globally, internet properties owned by Microsoft were visited by 266.3 million people in March, according to Nielsen Online, while Yahoo! properties were visited by 194.5 billion. Google properties attracted 283.5 million visitors.

"The question is, is there a better way to get to scale more quickly?" Mr Ballmer said. "I'd like to have a better position relative to the guy who sells the most advertising."

There were only five or six properties on the internet that "had any real scale", he said: MySpace, which is owned by News Corp, Facebook, Yahoo!, Google, AOL, the internet division of Time Warner, and Microsoft's MSN.

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