Yahoo! shares sank by a fifth within minutes of New York's stock market opening today after traders reacted to Microsoft's decision to abandon plans for its $47.5 billion hostile approach.

Shares in the online search engine fell $5.36 to $23.31, well below the $33-per-share revised offer that Microsoft made at the end of last week to Jerry Yang, co-founder of Yahoo!.

Mr Yang is now under pressure from his own shareholders to prove that his decision to reject a 70 per cent premium was the right one. It is understood that Mr Yang is continuing talks with AOL, the internet business of Time Warner, and with News Corporation, the parent of The Times, about potential joint ventures.

Some analysts believe Yahoo!'s stock price will surrender most of its 50 per cent gain since Microsoft made its initial offer on January 31 in an effort to challenge online advertising and search leader Google. The anticipated sell-off would leave Yahoo’s market value hovering around $30 billion.

Darren Chervitz, co-manager of the Jacob Internet Fund, a Yahoo shareholder, said today: “Clearly there's frustration. I am not even sure if Yahoo! cares about its shareholders because they didn’t show much regard for shareholders’ best interests in this process.”

At the beginning of February, Steve Ballmer, chief executive of Microsoft, published a letter sent to Mr Yang detailing a proposal to buy Yahoo! for $45 billion, or $31 per share payable in cash and Microsoft stock. That offer represented a 62 per cent premium to the Yahoo! share price the day before the approach was made public.

Mr Yang had rejected the approach claiming that the valuation was too low and sought tie-ups with other media and technology companies to avoid a takeover by Microsoft.

At the weekend, Mr Ballmer tried to close the deal by adding $5 billion to the offer price, increasing the bid price to $33 a share. Mr Yang is understood to have argued that he would not accept any valuation below $38 a share.

Microsoft published a letter sent to Mr Yang at the weekend, detailing his decision to walk away. The letter also revealed that Mr Yang had threatened to outsource a lucrative part of its business to Google, their larger rival, in the event that Microsoft tried to launch a formal, hostile takeover. Such a move, Microsoft argued, would have damaged Yahoo!'s business.

Microsoft shares rose almost 2 per cent to $29.97 yesterday. It is understood that the software giant is already considering other acquisitions to boost its share of the internet search and online advertising market.

Microsoft has already been approached by AOL with a view to a possible tie-up.

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