In a flash of defiance, Yahoo has rejected Microsoft’s hefty $44.6 billion offer for the company, testing the ground for an even bigger bid.

It appears that Microsoft may be prepared to sweeten its offer, but not by enough to satisfy the Yahoo board, which the software giant may want to retain.

From Yahoo’s point of view, a further rejection could lead to a hostile takeover battle which it may be ill prepared to fight.

Microsoft is gambling that buying Yahoo would transform both companies’ attempts to overhaul Google in search and advertising.

The unsolicited offer represents a 62pc premium over the internet company’s recent share price.

However, in a Friday counter-attack, Google’s Chief Executive Eric Schmidt called Yahoo CEO Jerry Yang to offer help to stall Microsoft’s bid.

Yahoo is believed to be looking at other ways to survive this “unsolicited bear-hug”, including the emergence of a rival bidder or a business tie-up with Google that will allow it to remain independent.

The Wall Street Journal reports, “No serious alternative bids have emerged, and antitrust experts say Google’s latitude to do even a business deal with Yahoo is minimal because of likely regulatory concerns. At Microsoft, optimism is growing that the $31-a-share offer for Yahoo that it made public Friday will go through in the absence of rival bids …”

This could be a long war of attrition.

Microsoft has unveiled its revamped search engine which indexes more pages than before and claims to give direct answers to factual questions. It also features tools to assist searchers in creating more detailed queries.

With competition intense in the search engine sector, Google still lords it over the rest as the site people turn to most often when they go online to search for an answer or image.

The BBC reports : “In the last year, however, Google has faced greater competition than ever for users as old rivals, such as Yahoo and Microsoft, and new entrants such as Amazon and Blinkx, try to grab some of the searching audience for themselves. This renewed interest has come about because of the realisation that many of the things people do online begin with a search for information — be it for a particular web page, recipe, book, gadget, news story, image or anything else. ”

Microsoft is aiming to develop a significant rival to Google’s offerings.

So far, the company has indexed 5bn webpages and claims to update its document index every two days — more often than rivals. The Microsoft search engine can also answer specific queries directly rather than send searchers to a page that may possibly contain the answer.

For its direct answer feature, Microsoft is calling on its Encarta encyclopaedia to provide answers to questions about definitions, facts, calculations, conversions and solutions to equations. Tools sitting alongside the MSN search engine allow users to refine results to specific websites, countries, regions or languages. Microsoft is also using so-called “graphic equalisers” that let people adjust the relevance of terms to get results that are more up-to-date or more popular.

Tony Macklin, Product Director of Ask Jeeves, claimed that its search engine has been answering specific queries since April 2003. “The major search providers have moved beyond delivering only algorithmic search, so in many ways Microsoft is following the market.”

Brian Caulfield, writing in Forbes magazine, asks who’s winning the battle between Microsoft and Google? The answer, according to him, is Apple.

Microsoft was originally condemned to be broken up after it was deemed to be a monopoly by a federal judge in November 1999. Bill Gates fought that off in November 2001 on appeal, agreeing to a settlement.

The deal blocked Microsoft from preventing rivals building applications to run on Windows. Steve Jobs has been using that ruling to make Apple a Windows software player ever since.

For starters, Apple can now do all sorts of things with its operating system that are off-limits for Microsoft. In January 2001, it introduced Apple iTunes, software for buying and managing multimedia content that is now baked into every Apple. In January 2003, it introduced a browser, dubbed Safari. In 2005, Apple released a version of its OS X operating system with a slick, built-in search feature dubbed Spotlight. “They’re the only company that actually forced Microsoft off of the operating system because of their integrated Safari browser,” says Rob Enderle, principal analyst at Enderle Group, referring to the latest version of Apple’s OS X software.

Better still, from Apple’s point of view, Microsoft has to keep its doors wide open to whatever Apple product Jobs cares to give away. That’s helped Apple’s iTunes software crush Microsoft’s alternative among users of the Windows operating system. “It’s like giving a glass of ice water to somebody in hell,” quipped Jobs at this month’s D: All Things Digital conference in Carlsbad, Calif.

For Apple, the trick is selling more hardware, not destroying Microsoft’s software monopoly. And Apple can give away its software because that’s not where it makes its money.

Microsoft seems to have jumped out of the frying pan into the fire.

Microsoft was put on the back foot today by the announcement of Google’s Office challenger, Apps Premier, its subscription package of premium, business applications hosted online.

For $50 (£26) a year per user, Google Apps Premier Edition will offer business customers a number of web-based applications including email, word processor and spreadsheet. It will compete with Microsoft Office’s desktop-based Word and Excel.

A Microsoft spokesman downplayed the launch, claiming online services such as Google’s are “not alone in altering today’s technology industry. Productivity applications represent a very competitive space in which more than 450 million users around the world have consistently chosen Microsoft.”

The Times (London) says : “Microsoft’s Business Division, which includes Office, accounted for $3.5 billion of the group’s revenues of $12.5 billion in the latest reported quarter, making it the largest source of sales. However, industry insiders say that Google has been quietly preparing for months to tap Microsoft’s cash-cow. Keen to supplement its lucrative search business, Google has built massive data-storage plants, thought to be years ahead of those so far developed by Microsoft and IBM.”

This “cloud” is now being used to host both software and data, while the internet becomes ever more the operating system.

Tom Austin, of Gartner, the technology analysts, said: “This constitutes a real threat to Microsoft’s business model. Eventually, it will have to switch from limited-use licences to software as a service. That will require a fundamental reengineering.”

Despite investing heavily in Office 2007, which was released earlier this month and which, like its predecessors, is anchored firmly to the PC, Microsoft has earmarked $2 billion to develop its own data centres.

The company added that it is now partnering other businesses “to capitalise on emerging services, such as advertising-based software, subscription or on-demand software”.

Most of the Premier Edition components are already available free. “From today, for the first time, it will charge for “white label” tools that carry its customers’ brands, so that e-mail addresses can be in the name of the client company.”