“I do think there is a fairly compelling set of economics that underpin the idea of a search partnership, and, unless Im fooling myself, over time, I think there is a good opportunity for a deal,” Ballmer said today at a conference in New York.

Ballmer said Microsoft will have to keep up capital and research investments to compete with Google Inc. Microsofts search engine handled about 8 percent of search queries in the U.S. in February, compared with 63 percent for Google, according to researcher ComScore Inc. Microsoft, the worlds largest software maker, is testing a new search site under the name Kumo.com. The project still needs a final name, Ballmer said today.

Even though Microsoft is working to improve its search product, Ballmer said his interest in a deal with Yahoo is to handle more search queries, not to improve Microsofts technology. The stakes in the search business are higher than Microsoft initially thought, Ballmer said.

Ballmer said he introduced himself to Bartz over the phone. Bartz has said she will negotiate in private on any deal and has said she doesnt want Yahoo to be “pulled apart and left for the chickens.”

Microsoft, based in Redmond, Washington, rose 17 cents to $17.13 at 10:41 a.m. New York time on the Nasdaq Stock Market. Yahoo, in Sunnyvale, California, added 61 cents to $14.03.

Ballmer also said he would relish an acquisition of Sun Microsystems Inc. by International Business Machines Corp. because it would create a distraction for the companies. Ballmer said he doesnt “exactly get” the thinking behind the combination.

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