NEW YORK (Reuters) - Financier Carl Icahn on Thursday launched a proxy battle to force Yahoo Inc to reopen buyout talks with Microsoft Corp, saying the Yahoo board had acted "irrationally" in refusing its $47.5 billion offer.

Icahn harshly criticized Yahoo for the breakdown in talks, saying he accumulated 59 million shares and options in Yahoo and assembled a 10-member dissident board slate for election at Yahoo's annual meeting on July 3.

"It is clear to me that the board of directors of Yahoo has acted irrationally and lost the faith of shareholders and Microsoft," Icahn wrote in an open letter to Roy Bostock, Yahoo chairman. "It is obvious that Microsoft's bid of $33 per share is a superior alternative than Yahoo's prospects on a stand alone basis."

But the New York-based billionaire left the door open for a settlement instead of a full-blown proxy battle, where both sides typically spend millions of dollars and unleash a barrage of negative charges against each other. He urged Yahoo to "move expeditiously to negotiate a merger with Microsoft, thereby making a proxy fight unnecessary."

The move came just two weeks after Microsoft walked away from three-month talks to buy Yahoo in a bid to catapult it into a top provider of on-line commerce and services. But Microsoft's final $33-per-share offer wasn't enough to sway Yahoo CEO and co-founder Jerry Yang, who wanted $37 per share.

Yahoo shares traded up on the news, which was well flagged in recent days. Shares were recently trading up 34 cents to $27.48, up 1.25 percent on Nasdaq.

One analyst said Yang will face a rougher road dealing with Icahn, a blunt-spoken veteran financier known for bare-knuckle takeover tactics, than Microsoft CEO Steve Ballmer.

"If Jerry Yang had a tough time dealing with Steve, wait till he meets Carl Icahn," said Colin Gillis, a Canaccord Adams analyst.

A bigger threat, said Gillis, is whether Microsoft is willing to come back to the table. "It's not clear that he has a buyer. We think that Microsoft has really walked away."

"This is a damaged goods deal. There's been a lot of negative opinion expressed about this on both sides. For a deal of this magnitude to work, you need broad support on both sides."

Icahn's slate of nominees includes himself, Frank Biondi, a former Viacom Inc chief, and Keith Meister, vice chairman of Icahn Enterprises.

Mark Cuban, Dallas Mavericks basketball team owner and co-founder of cable network HDNet is also on Icahn's slate. Cuban is also familiar with Yahoo's negotiating style after he sold Broadcast.com to Yahoo in 1999 for about $5 billion.

Other nominees include Lucian Bebchuk, professor of law, economics and finance at Harvard Law School; John Chapple, president of Hawkeye Investments; and telecoms industry veteran and former chief executive of Nextel Partners; Adam Dell, managing partner of Impact Venture Partners; Edward Meyer, CEO of Ocean Road Advisors and former CEO of advertising firm Grey Global Group; Brian Posner, a former CEO of ClearBridge Advisors LLC; and Robert Shaye, the former co-CEO of Time Warner Inc's New Line Cinema.

Icahn also disclosed in the letter that he sought antitrust clearance from the U.S. Federal Trade Commission to acquire up to about $2.5 billion worth of Yahoo stock.

(Reporting by Kenneth Li, Dane Hamilton, Michelle Gershberg, Eric Auchard, editing by Dave Zimmerman)

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