Yahoo talks to Microsoft, trades barbs with Icahn

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(Adds Yahoo letter responding to Icahn attack)

By Michele Gershberg and Paul Thomasch

NEW YORK, June 4 (Reuters) - Yahoo Inc (YHOO.O) said on Wednesday that deal talks are ongoing with Microsoft Corp (MSFT.O) as the company resisted an attack by billionaire critic Carl Icahn, who called its recent actions "deceitful."

Yahoo President Susan Decker trumpeted new ad partnerships with Wal-Mart Stores Inc (WMT.N) and others as Icahn, an activist investor, stepped up pressure on Yahoo over its rebuff of Microsoft's $47.5 billion buyout offer.

She said some form of deal with Microsoft could still come about, sending Yahoo shares up 2.7 percent for the day, despite Icahn's later blistering attack on Chief Executive Jerry Yang's leadership at Yahoo.

In an invective-filled letter to Yahoo, Icahn used terms like "deceitful," "self-destructive," "misleading" and "insulting to shareholders" for moves by Yang and the board to retain employees in a severance plan likely to make a deal with Microsoft more costly.

He called on Yahoo to rescind anti-takeover defenses and merge with Microsoft, writing "even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft."