Icahn said Thursday that he owns the equivalent of 59 million Yahoo shares and created a slate of 10 directors, including Mark Cuban and Frank Biondi Jr. All 10 of Yahoo's directors are up for re-election at the annual meeting on July 3.

Icahn has led proxy fights at companies such as Motorola Inc. and drugmaker ImClone Systems Inc., frequently pushing them to sell part or all of their businesses to help revive sagging share prices. Thursday he urged Yahoo to make a deal with Microsoft, saying the combination "is by far the most sensible path" if they want to take on Google Inc.

"The board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft," Icahn, 72, said in a letter to Yahoo's board. "I sincerely hope you heed the wishes of your shareholders and move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary."

Yahoo, based in Sunnyvale, California, climbed 44 cents, or 1.6 percent, to US$27.58 at 8:57 a.m. New York time in trading before U.S. markets opened after closing at US$27.14 Wednesday on the Nasdaq Stock Market. The stock had fallen 32 percent in the year before Microsoft's bid. Microsoft, the world's biggest software maker, gained 15 cents to US$29.93 Wednesday.

Yahoo Chief Executive Officer Jerry Yang rejected Microsoft's US$33-a-share offer this month, saying his company was worth at least US$4 more. Buying Yahoo would have helped Microsoft compete with Google in Internet searches and online advertising, a market the company expects to almost double to about US$80 billion by 2010.

Google, based in Mountain View, California, handled almost two-thirds of U.S. search queries in March. That compared with 21.3 percent for Yahoo and less than 10 percent for Microsoft, according to ComScore Inc., a market researcher in Reston, Virginia.

"For Microsoft to get involved in a proxy fight, it would have created a lot of ill will with Yahoo shareholders," said Youssef Squali, a Jefferies & Co. analyst in New York. Bringing Microsoft in later as a white knight "may turn out to be the winning strategy."Microsoft had created its own slate of potential directors for Yahoo as CEO Steve Ballmer weighed a hostile takeover. After Microsoft walked away from the deal, its law firm sent letters to the 10 potential board members and some alternates releasing them from their contracts, a person familiar with the matter said.

Should Microsoft fail to reemerge as a bidder, Icahn may have to find other ways to boost shareholder value, such as aligning the company with Google or selling stakes in Yahoo's Asian operations, said Ross Sandler, an RBC Capital Markets analyst in New York.

"It opens up the door for everything from completely carving this thing apart and extracting value that way, to getting Microsoft back on board, to getting a new management team there to run it," Sandler said. He advises investors to buy Yahoo shares, which he doesn't own.

Icahn built his reputation in the 1980s as a corporate raider, targeting big companies such as Phillips Petroleum Co., Texaco Inc. and Trans World Airlines Inc.

At Motorola, Icahn backed the idea of splitting off the company's mobile-phone business, a plan CEO Greg Brown adopted in March. Icahn also has supported an effort by video-store chain Blockbuster Inc. to purchase electronics retailer Circuit City Stores Inc. He said last week that he would buy the company himself if Blockbuster couldn't get financing.

Icahn also prodded BEA Systems Inc. to accept a takeover offer from Oracle Corp. Icahn took some credit for the US$8.5 billion transaction, telling Bloomberg in January that he helped convince BEA's board to agree to terms.

"He's proven to be as successful in these situations as any activist investor -- probably ever," RBC's Sandler said.