The announcement lifted Yahoo's share price by almost 50 percent in morning trading, while Google fell more than 8 percent, dragged down by a fourth-quarter earnings report that missed Wall Street expectations.
Microsoft's previous offer was rebuffed by Terry Semel, who stepped aside last year as chief executive under shareholder pressure.
If accepted by Yahoo's shareholders, the deal, which is half in cash and half in stock, would end up creating a major competitor to Google, the search giant that currently dominates the Internet search market.