Microsoft Corp. has given indications that it will not raise its bid for Yahoo Inc. and that it will lobby the internet company's shareholders to accept its previous bid of $44.6 billion U.S.

In a press release issued late Monday, the Redmond, Wash.-based software giant said Yahoo's rejection of its offer earlier in the day was "unfortunate," and that its bid was "full and fair."

"We are confident that moving forward promptly to consummate a transaction is in the best interests of all parties," Microsoft said in its release. "As we have said previously, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realize the value inherent in our proposal."

Earlier in the day, Yahoo formally rejected Microsoft's $44.6 billion US takeover bid as inadequate. The response had been expected after Yahoo's intentions were leaked over the weekend.

In its formal response, Yahoo said its board had concluded Microsoft's unsolicited offer "substantially undervalues" the Sunnyvale, Calif.-based company.

Yahoo indicated it could be lured to the negotiating table if Microsoft raises the ante, without mentioning the price it has in mind.

"The board of directors is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment and we remain committed to pursuing initiatives that maximize value for all stockholders," Yahoo said in a statement.

Yahoo's rebuff raises the stakes in a battle involving two of the world's most prominent technology companies.

Many analysts expected Microsoft to raise its offer by $5 billion US to $12 billion US to entice Yahoo to sell. Yahoo is believed to want a bid of at least $56 billion US, or about $40 US per share.

Microsoft's first offer, which was made public Feb. 1, was originally valued at $31 US per share. Microsoft also could take its bid directly to Yahoo shareholders, an outcome that seems likely given the tenor of its statement Monday night.

The decision could provoke a showdown between the two tech giants, with internet search leader Google Inc. looming in the background. Leery of Microsoft expanding its turf on the internet, Google already has offered to help Yahoo avert a takeover and urged antitrust regulators to take a hard look at the proposed deal.

Microsoft could bypass board

If the world's largest software maker wants Yahoo badly enough, Microsoft could try to override Yahoo's board of directors by taking its offer straight to the shareholders. Pursuing that risky route probably will require Microsoft to attempt to oust Yahoo's current 10-member board.

Yahoo's board reached the decision after exploring a wide variety of alternatives during the past week, according to the source who spoke to the Associated Press.

Yahoo's board concluded Microsoft's offer is inadequate even though the company couldn't find any other potential bidders willing to offer a higher price.

Without other suitors on the horizon, Yahoo has had little choice but to turn a cold shoulder toward Microsoft if the board hopes to fulfill its responsibility to fetch the highest price possible for the company, said technology investment banker Ken Marlin.

"You would expect Yahoo's board to reject Microsoft at first," Marlin said. "If they didn't, they would be accused of malfeasance."

But, by spurning Microsoft, Yahoo risks further alienating shareholders already upset about management missteps that have led to five consecutive quarters of declining profits.

The downturn caused Yahoo's stock price to plummet by more than 40 per cent, erasing about $20 billion US in shareholder wealth in the three months leading up to Microsoft's bid.