In response, Yahoo issued a statement saying it continues to be willing to reopen talks with Microsoft, but "we feel strongly" that any deal negotiated between Icahn and Microsoft "would not lead to an outcome that would be in the best interests of Yahoo stockholders."

"If Microsoft and Mr. Ballmer really want to purchase Yahoo, we again invite them to make a proposal immediately," Yahoo said.

Icahn also said he is actively interviewing replacements for Yahoo CEO Jerry Yang and its management team. "I am moving towards getting a potential new management team for Yahoo including a new CEO," he said in a phone interview.

The long-awaited signals that the Microsoft-Yahoo talks could be revived sent Yahoo stock up more than 10 percent in Monday trade.

In early afternoon trading, Yahoo stock was up $2.23, or 10.4 percent, to $23.58 on Nasdaq. Microsoft shares were down 39 cents, or 1.5 percent, at $25.59.

Sanford C. Bernstein senior Internet analyst Jeffrey Lindsay said that if Microsoft is serious about resuming talks, "there is rationale for voting for the Icahn slate and essentially ousting the current Yahoo board and probably the management too.

"At the end of the day, you would have to expect that the big institutional shareholders would go for a deal with Microsoft," Lindsay added.

Mithras Capital partner Mark Nelson, whose firm controls 1.7 million Yahoo shares, said management change at Yahoo "has to happen."

"They've had plenty of time to right the ship," said Nelson. "The record over the past two or three years speaks for itself. They blew it and new management is needed to better exploit all the assets there."

Talks between Yahoo and Microsoft broke down in early May. Microsoft originally offered $31 per share and raised it to $33, but Yahoo demanded $37 per share.

After talks collapsed, Icahn amassed a stake in Yahoo and launched a proxy war to replace the Yahoo board and management, claiming they "botched" the Microsoft talks.

In his letter, Icahn said: "Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo," including purchasing either its "search" function with large financial guarantees, or an outright purchase of Yahoo, said Icahn in the letter.

Microsoft said it would be premature to discuss details, such as the price it might offer for Yahoo.

Icahn said he would immediately move to replace Yang if his board slate were elected at the August meeting.

(Additional reporting by Robert MacMillan and Yinka Adegoke in New York, Dai Wakabayashi in Seattle, and Eric Auchard and Anupreeta Das in San Francisco)

(Reporting by Dane Hamilton; editing by Gunna Dickson and Derek Caney)

© Thomson Reuters 2008 All rights reserved