Still an Ambiguity : Alliance of Google And Yahoo!

The prospects for a Web-advertising partnership between Google Inc. and Yahoo Inc. have dimmed, with both sides considering walking away from the deal as early as next week, say people familiar with the matter.

The two companies met Thursday with the Justice Department, part of a series of meetings to address the concerns of regulators. While the parties may agree to continue the talks -- or they could reach a resolution -- there are signs they are unwilling to make compromises to address the Justice Department's objections.

Google spokesman Adam Kovacevich said his company continues to have "cooperative discussions with the Department of Justice about this arrangement." He added, "We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process."

Yahoo spokeswoman Tracy Schmaler said discussions with the Justice Department are "ongoing," adding, "we believe strongly that this agreement will strengthen Yahoo's competitive position."

The partnership, announced in June, would allow Yahoo to display search ads sold by Google and take a cut of the revenue. The alliance instantly drew criticism that it would give Google too much clout in online ads.

The option to scrap the deal has been on the table before, but Google in particular has begun considering it more seriously as Justice Department talks haven't progressed. One sticking point has been the department's discussion of having the companies sign a consent decree stating the terms of the partnership. That would subject their compliance to continuing oversight by a judge.

A withdrawal would be a big blow for the companies, Yahoo in particular. When the deal was announced, Yahoo rejected a separate search offer from Microsoft Corp. Yahoo hopes the Google deal would help it generate hundreds of millions of dollars in added revenue.

At the time, both sides said they would delay implementing the partnership to allow regulatory review. They later said they would implement the arrangement around early October regardless of whether regulators indicated they would seek to block it. But they haven't gone ahead.

By dropping out, Google would likely be seeking to avoid a legal battle that would spotlight its market power. For Yahoo, backing out would clear a path to pursue other alliances to help turn around its business. Yahoo has been in talks about combining with Time Warner Inc.'s AOL.