Software giant Microsoft has dropped itsthree-month-old bid to buyinternet firm Yahoo because the two sides cannot agree on an acceptablesale price.

Microsoft chief executive Steve Ballmer formally withdrew the offerin a letter to Yahoo chief executive Jerry Yang.

Mr Ballmer said Microsoft had raised its original offer from $44.6bnto $47.5bn (£24.1bn) - $33 per share.

But he added that Yahoo had insisted on at least $53bn, or $37 ashare - more than Microsoft was prepared to pay.

The software giant had wanted to do a deal to be able to competewithGoogle, which dominates the lucrative market for internet advertising.

This market was worth $40bn in 2007 and is predicted to double to$80bn by 2010.

'Distraction'

In his letter to Mr Yang, which has been posted on the Microsoftwebsite, Mr Ballmer said: "We continue to believe that our proposedacquisition made sense for Microsoft, Yahoo and the market as a whole.

"Despite our best efforts, including raising our bid by roughly$5bn, Yahoo has not moved toward accepting our offer.

"After careful consideration, we believe the economics demandedby Yahoo do not make sense for us, and it is in the best interests ofMicrosoft stockholders, employees and other stakeholders to withdrawour proposal."

Mr Ballmer also told Yahoo's boss that he would not pursue hisoriginal plan B of launching a hostile takeover battle, because Mr Yangwould "take steps that would make Yahoo undesirable as an acquisitionfor Microsoft".

Mr Ballmer told his own employees that Microsoft could achieve itsgoals without Yahoo, albeit at a slower pace.

Yahoo maintained that Microsoft had offered too little to buy thecompany.

In a statement issued after Microsoft's withdrawal, Yahoochairman Roy Bostock dismissed the unsolicited bid as a "distraction".

Microsoft's shares closed on Friday virtually unchanged at $29.24.Yahoo's shares were $1.85 higher at $28.67 amid expectations of ahigher Microsoft offer.

The BBC's Peter Bowes says analysts believe the breakdown intalks may have an adverse affect on Yahoo shares and generateuncertainty among investors about the company's management.