Microsoft and Yahoo began takeover talks Friday with the US software giant open to raising its 44.6-billion-dollar bid for the struggling Internet pioneer, a source close to the situation told AFP.

Yahoo and its unsolicited suitor are privately discussing the buyout bid after months of negotiating indirectly with public comments, emails and online postings, the source said.

"They are talking -- there are no guarantees," the source told AFP.

"Microsoft signaled it might raise the price and the question is how far. It could still fall apart."

Microsoft has indicated it might raise its ante from 31 to 33 dollars per share and the Yahoo board has signaled it might accept an offer of 37 dollars per share, according to Canaccord Adams analyst Colin Gillis.

"They are close enough now that to sit down and talk about it makes sense," Gillis said of Microsoft and Yahoo.

The negotiations appeared to break tension that has built since Yahoo rejected the offer Microsoft put on the table on February 1 and ignored an April 26 deadline the software maker gave the California firm to accept.

Microsoft is eager to merge online resources with Yahoo to take on Google, which dominates the lucrative Internet search advertising market that is expected to grow to 80 billion dollars annually worldwide in the next two years.

Yahoo's stock price leapt nearly seven percent to 28.67 in late trading as investors bet that Microsoft will raise its offer instead of "going hostile" and trying to oust Yahoo's deal-blocking board of directors.

Word of the talks came as analysts and industry watchers anxiously awaited the next move by Microsoft, which was mulling options that included a proxy fight and walking away from the deal.

Microsoft chief executive Steve Ballmer told employees Thursday he would not pay "a dime above" what he thinks Yahoo is worth and they would know the next move in the takeover quest "in very short order."

"I know exactly what I think Yahoo is worth and I won't go a dime above," Ballmer said during an in-house exchange posted on the Internet, without specifying his self-imposed price cap.

Microsoft's chief financial officer, on the other hand, told analysts a week earlier that he was opposed to paying more for Yahoo simply because Microsoft could.

"With the right circumstances it'll happen," Ballmer is quoted as saying in a Wall Street Journal interview published Friday. "Without the right circumstances it won't happen"