The two companies should pool resources to compete with Google Inc., the dominant Internet search engine, Ballmer said yesterday at an analyst meeting in New York. A minute earlier, he said Microsoft has lured about 10 engineers from Yahoo.

“You all know that I would like to figure out how to pool somehow Microsoft and Yahoo,” Ballmer said. “Im hoping thats a reasonable conversation to have with new management at Yahoo.”

Ballmers comments gave investors more hope for a deal after Yahoo rejected Microsofts $47.5 billion hostile takeover offer last year, said Sachin Shah, an analyst with ICAP in Jersey City, New Jersey. Yahoo CEO Carol Bartz, who took over from Jerry Yang last month, is working to reverse three straight years of profit declines.

Ballmer is saying, “Wed like to do a deal sooner rather than later, and, guys, were trying to call you,” said Shah, who recommends buying Yahoo shares. “The winds may have shifted toward Yahoo.”

Both Ballmer and Bartz are under pressure to shore up their Internet search engines and online advertising businesses, which even when combined generated less than half of Googles revenue in the fourth quarter. Google controls the Internet-search market in the U.S. with 63 percent of queries, according to ComScore Inc. of Reston, Virginia.

Jerry Yang

Ballmer, who has invested billions of dollars in Microsofts online advertising business, said its important not to ignore shareholder concerns about generating a return on Microsofts Internet investments.

“I dont want to wind up being known as the Jerry Yang of this market,” said Ballmer, 52. “That whole episode left me understanding how shareholders can get frustrated with managements who arent serious about performance.”

Ballmer said that he doesnt know if a deal will happen with Yahoo. Yahoo spokeswoman Kim Rubey declined to comment on Ballmers presentation.

Yahoo, based in Sunnyvale, California, rose 78 cents, or 6.5 percent, to $12.75 yesterday in Nasdaq Stock Market trading. The shares have climbed 4.5 percent this year. Microsoft, down 12 percent this year, fell 4 cents to $17.17.

Ballmer didnt specify which engineers he has hired from Yahoo, except for Qi Lu, who was named president of Microsofts online-services group in December. Microsoft hired Internet- search executive Sean Suchter as general manager of its Silicon Valley Search Technology Center the month before. Two weeks ago, Microsoft hired Larry Heck, who oversaw a Yahoo lab that developed search and advertising algorithms.

Ballmer is more open to negotiating with Bartz than with Yang, increasing the chances that a deal gets done, said Sandeep Aggarwal, an analyst with Collins Stewart LLC in San Francisco.

In her first earnings conference call, Bartz said she would consider offers to buy the companys assets, while adding that she didnt come to Yahoo with the intention of selling it.

“She knows they need to do a deal,” Shah said. “Right now, shes still trying to understand the situation.”

Microsoft, which has less than 10 percent of the U.S. Internet search market, could combine with Yahoo to claim 30 percent share, according to ComScore.

“Some people say to me, Why dont you just give up?” Ballmer said. “This is a huge market. You give up, you cant get back in the game.”

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