Microsoft has proposed to buy Yahoo's search business and take a minority stake in the Web pioneer, stopping short of a full-out merger, a person familiar with the discussions said on Monday. As part of the deal Yahoo would put its Asian assets, including significant minority stakes in Yahoo Japan and China's Alibaba Group, up for sale, while Microsoft would buy a chunk of what remains of the company, Reuters reported today citing an unnamed source.

The talks were revealed by the two companies on Sunday, but they declined to reveal the terms of the discussions. Earlier this month, Microsoft walked away from a proposal to acquire Yahoo for $47.5 billion, or $33 per share, after Yahoo rebuffed the offer, saying it would only settle for $37 a share.

The new deal, if completed, would forge an alliance between the two companies that would represent an alternative means of competing with rival Google, whose search engine has made it an online advertising powerhouse.

Yahoo is a distant second to Google in Web search in the United States, and Microsoft is third.

Combined, Yahoo and Microsoft would have around a 30 percent U.S. share, compared with Google's roughly 60 percent, according to figures from research firm comScore. Google's lead is even larger on a global basis, according to comScore.

The proposal from Microsoft would likely complicate ongoing discussions between Yahoo and Google. The two companies are still talking about a possible search advertising partnership.