Mumbai: Yahoo Inc has finally ended merger talks with Microsoft Inc and reached a non-exclusive ad search deal with internet rival Google Inc.

The Microsoft deal failed because, Yahoo said, it did not accept the proposal to buy only its search business.

Yahoo said it would instead let Google sell search ads on its site, dealing a big blow to Microsoft's plan to establish a strong footing in the online advertising market.

Under the agreement, Yahoo will run ads supplied by Google alongside its own search results and on some of its websites in the US and Canada, Yahoo said in a statement, adding the deal would add as much as $800 million in its annual revenue.

Yahoo expects the deal to generate an additional $250 million to $450 million operating income in the first year itself.

The deal, initially for four years, can be extended up to 10 years under mutual consent.

While Google and Yahoo - No 1 and No 2 respectively in internet search business - will pit ads against each other in auctions, others could also join in the bidding to place ads.

"This deal in many ways reflects an emerging and new structure for the industry," Google CEO Eric Schmidt said, adding  "Certainly we'd like to do more business with Yahoo over time."

The non-exclusivity clause is expected to make the deal easier to pass regulatory approval.

Google has similar deals with Time Warner Inc's AOL and IAC/InterActiveCorp's Ask.com.

Larry Page, who founded Google with Sergey Brin, said the two formed the company by watching Yang and David Filo develop Yahoo.

Yahoo and Google will also wait 3-1/2 months for regulatory approval and to offer a way-out in case of a Yahoo take-over.

Yahoo rejected Microsoft's latest proposal to buy its search business, including an offer to buy 16 per cent of Yahoo for $35 per share, as it failed to fit into its growth plan.

Yahoo said Microsoft, which had earlier offered to buy the whole of Yahoo at $33 a share, amounting to $47.5 billion, was no longer interested in buying the company outright, even at that price.

Microsoft, which was hoping to capitalise on the online ad business and compete with Google, said it was still open to an alternative deal with Yahoo.

Market analysts have ruled out another round of negotiations between Yahoo and Microsoft. The software giant may look elsewhere, they content.