Microsoft has thrown its weight behind investor Carl Icahn’s effort to dump Yahoo’s board, saying a successful shareholder rebellion would encourage the software maker to renew its bid to buy Yahoo’s internet search engine, or possibly the entire company.

The unexpected endorsement gives Mr Icahn a carrot to dangle before Yahoo shareholders as he wages an acrimonious campaign to replace Yahoo’s nine directors at the company’s annual meeting on August 1.

It marks the first time that Microsoft has publicly sided with Mr Icahn since the billionaire investor launched his attempted coup nearly eight weeks ago.

The two sides decided they could work together after Icahn held “frequent” discussions with Microsoft chief executive Steve Ballmer and some of his top lieutenants during the past week, according to a letter that Mr Icahn sent to Yahoo shareholders.

Industry analysts said Mr Icahn now had more credibility with Yahoo shareholders because he had been arguing that a purge of Yahoo’s board was the only way to salvage a deal with Microsoft.

“This breathes new life into Icahn’s proposal,” said Stanford Group analyst Clayton Moran. “It really pushes the power to Icahn and his board (nominees).”

The prospect that a changing of the guard at Yahoo might pave the way to a friendly deal with Microsoft lifted Yahoo shares £1.29, or 12 per cent, to finish Monday at £11.90.

Echoing previous remarks in its battle with Mr Icahn, Yahoo questioned Microsoft’s interest in buying the entire company.

“If Microsoft and Mr Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately,” Yahoo said.

But Mr Icahn said Microsoft did not want to risk making a bid under Yahoo’s current regime, because the software maker fears Yahoo’s management would make more poor decisions during an antitrust review that would take at least nine months.

“If the current board and management team of Yahoo mismanage the company (and their recent track record is far from reassuring), Microsoft would be putting its money at risk and a great deal could be lost,” Mr Icahn said in his letter to shareholders.

Microsoft’s willingness to work with Mr Icahn undermines one of Yahoo’s chief arguments for re-electing its board.

Yahoo has maintained that it would be foolhardy to back Mr Icahn’s slate of alternate nominees because Mr Icahn had no concrete ideas besides selling the company to Microsoft - something that Yahoo has been depicting as a pipe dream since Microsoft withdrew a £23.75 billion offer in early May.

Microsoft reinforced that perception by refusing to revive its bid last month, even after Yahoo’s board signalled its willingness to accept the earlier offer.

The turn of events steps up the pressure on Yahoo co-founder and chief executive Jerry Yang, 39, whose handling of the earlier negotiations with Microsoft infuriated many shareholders.

Yahoo’s stock price had plunged by more than 30 per cent to fall below £10 during Mr Yang’s first six months as CEO.

Then, in January, Microsoft raised hopes for a quick windfall with its unsolicited takeover bid, only to be repeatedly rebuffed.

If he seizes control of the board, Mr Icahn has promised to sack Mr Yang and replace him with a more seasoned leader.