The compromise comes as shareholders, led by activist investor Carl Icahn, pile the pressure on the Yahoo! board to reopen talks with Microsoft, after the software giant walked away earlier this month.
The intervention of the Icahn and others appears to have been the spur that revived Microsoft's interests. However, the company made clear in a statement that it was not planning to make a full bid, but indicated that the situation could change:
"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo!, Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.
Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!.
"Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.
"There of course can be no assurance that any transaction will result from these discussions."
The latest talks cast a possible shadow over a Yahoo! alliance with Google. The two had been, much to the consternation of various parts of the industry, talking about a possible search advertising alliance.
Icahn has also added his weight to the Google debate and called on Yahoo! not to enter into any deals, such as the one with Google, that might lower the company's value to Microsoft.
According to the FT, while using the opportunity created by Icahn, Microsoft has not held any talks with the investor who has taken a significant stake in Microsoft.
In response to shareholder pressure, Yahoo! chief executive Jerry Yang said last week that they would not sell the company for less than the board believes it's worth. In their reckoning this is around $37 a share. Observers agree that Microsoft could probably up its $33-a-share deal to $34 or $35 and seal a deal.
In its own statement Yahoo! said it had confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time.
It added that it was examining "a number of value maximising strategic alternatives for Yahoo!", and remains "open to pursuing any transaction which is in the best interests" of stockholders.
The news could hit Yahoo!'s shares today. A takeover premium has crept back into Yahoo!'s stock in recent days following Icahn's intervention.