Shares of Yahoo! tumbled yesterday after Microsoft withdrew its offer to buy the company.

Yahoo! dived more than 20 per cent and it now faces major challenges.

Chief executive Jerry Yang needs another strategy up his sleeve, analysts said.

Yahoo! is likely to push for an advertising partnership with web search leader Google, sources said.

A tie-up with Google, seen as a big winner from the end of the Microsoft-Yahoo! talks, should help boost Yahoo!'s operating performance in the near term.

"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C Bernstein. "Let's hope they weren't bluffing."

Yahoo! is also still considering a deal with another internet media and advertising major, such as Time Warner's AOL.

But Mr Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materialises.

"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.

Conversely, Microsoft investors were relieved that chief executive Steve Ballmer didn't shell out billions more for Yahoo!.

Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Mr Yang dug in for a price of $37.

Mr Yang maintains that even the higher offer did not value Yahoo! properly for its investment in search technology, its prominence in online display advertising and other assets.

On Sunday, he sought to shore up that sentiment among employees.

"We have a spirit and a culture that is uniquely Yahoo!," Yang said in an email to staff. "Staying true to who we are has helped us pull through the recent uncertainty we've faced."

While some Yahoo! investors hoped it could wrest a price of $35 per share from Microsoft, a dissident shareholder said he would challenge Mr Yang and the board over the collapse of talks.

"Shareholders didn't even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith," Eric Jackson, who leads a group of investors who collectively own two million Yahoo! shares, insisted.

He said he would urge shareholders to withhold votes from the company's directors this year.

"The real winner in all of this seems to be Google," said Canaccord Adams analyst Colin Gillis.

"There's going to be no powerful number two."