It seems that Google and Yahoo both have abandoned their plans for an online advertising deal that would have allowed Yahoo to place ads on Google's Web sites. It is Google that made the announcement Wednesday morning saying that lingering concerns about the agreement would only lead to more strife in the form of legal battles and damaged relationships with partners. "That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement," the company wrote.

Nevertheless Yahoo was disappointed by this decision, saying it was "disappointed that Google has elected to withdraw from the agreement rather than defend it in court." Yahoo, the second most popular Internet search engine, was relying on the deal with Google to help to placate shareholders angry about Yahoo rejecting Microsoft's takeover offer. Yahoo's management has been under pressure since rejecting the $33 a share offer from Microsoft.

This deal was announced in June, but has faced anti-trust objections. Google said the companies tried to address the concerns of regulators but in the end failed to persuade them. "We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission," the company wrote. "That would be like trying to drive down the road of innovation with the parking brake on. Google's continued success depends on staying focused on what we do best: creating useful products for our users and partners."

It had the potential to help Yahoo's finances significantly, possibly increasing the company's cash flow by 25 percent in the first year. Original projections estimated that Yahoo would have reaped between $250 million and $450 million in profit.  But despite the fact that Yahoo acknowledges that Google's decision means no short-term cash infusion, the portal promises that it still has the resources to grow and innovate in the search market. Moreover on Tuesday, Yahoo said it would be willing to restructure the deal due to the concerns of antitrust regulators.

The controversial Google-Yahoo ad pact quickly came under fire from the World Federation of Advertisers when it was announced. The WFA argued that the ad deal would "have a detrimental effect on competition, result in price increases and reduce the options available to advertisers." And because of the fuss U.S. antitrust regulators began to take notice as well. Yahoo and Google then agreed to delay the deal, allowing it to be submitted to greater scrutiny by regulators. But Google eventually decided to give it up. Rumor has it that part of the impetus for Google's decision could be Yahoo's talks on buying the content and advertising operations of Time Warner Inc's AOL unit.

Microsoft shares recently fell 3% to $22.83 and Google’s fell 3.6% to $354. Yahoos are likely to fall to around $8.
It was Yahoo President Sue Decker who broke the bad news this morning.