NEW YORK/SAN FRANCISCO (Reuters) - Yahoo Inc extended a deadline to nominate board directors, buying the company time to pursue alternatives to Microsoft Corp's $41.7 billion offer, while also giving Yahoo room to negotiate a friendly deal with Microsoft.

The original March 14 deadline could have catapulted Microsoft and Yahoo into a formal proxy contest next week. Instead, Yahoo said on Wednesday the deadline would fall 10 days after it announces the date for its annual shareholder meeting, which has yet to be scheduled.

Yahoo has explored tie-ups with several other Internet and media companies that would allow it to retain more independence. Delaying board nominations reduces the pressure on Microsoft to turn hostile in its takeover strategy in which it could nominate an alternative slate of Yahoo directors.

Talks about a deal with Time Warner Inc's AOL unit have accelerated, a person briefed on the discussions said on Wednesday. News Corp and Yahoo are still discussing possible options, a source familiar with the talks said.

A Yahoo spokeswoman declined to comment the board actions beyond its previous statement that the company and its directors are continuing to consider all strategic options.

Canaccord Adams analyst Colin Gillis said the move was a delaying tactic by Yahoo as Chief Executive Jerry Yang looks for an alternative to Microsoft.

"It's a sign he doesn't really have any viable alternatives. He's trying to buy more time to dig up other solutions," said Gillis.

Gillis said it would be best for both companies if they could work out a deal.

"Microsoft has time working against it," he said. "They don't want to spend six months doing the dance with the (Yahoo) board and 12 months waiting for a deal to close."

After more than a year of intermittent talks, Yahoo rebuffed an offer that Microsoft made public on February 1 valuing the company at $31 per share in cash and stock. Based on current share prices, the deal would value Yahoo at $27 per share.

Yahoo shares rose 2 percent to $28.62 in early trading on the Nasdaq, indicating investors still expect Microsoft to sweeten its offer. Microsoft gained 2.6 percent to $28.31.

BREATHING ROOM

Such tactics are common in takeover battles. BEA Systems Inc delayed nominating directors in December for its annual meeting, setting the stage for negotiations that led BEA to accept a sweetened $8.5 billion bid by Oracle in January.

"It's an indication that probably Yahoo is less receptive to Microsoft than was initially believed," said analyst Jeffrey Lindsay of Sanford C. Bernstein, referring to the extension.

"It looks as if they've bought themselves several weeks by proposing this delay," he said. "It's probably the maximum they can do without incurring a lot more shareholder ill-will."

Yahoo Chief Executive Jerry Yang told employees in a letter that the extension would still allow Microsoft to nominate directors to its board, but the main aim was to create some breathing room.

"In light of the current circumstances, this change removes an imminent deadline," Yang said in the letter, which was filed with the U.S. Securities and Exchange Commission.

"Microsoft, of course, could still choose to name directors, but our objective here is to enable our board to continue to explore all of its strategic alternatives for maximizing value for stockholders without the distraction of a proxy contest," Yang said.

Yahoo has said the Microsoft offer significantly undervalues its worth, including a user base of nearly 500 million people, as well as lucrative overseas holdings. Wall Street had viewed that as an effort to wrest a higher price from Microsoft.

Microsoft, for its part, has not publicly budged from its original offer.

"We are fully aware of our options," a person close to Microsoft said.

Yahoo has yet to set a date for its annual shareholder meeting, which took place on June 12 last year and under Delaware laws -- where Yahoo is incorporated -- has up to 13 months to hold its next annual meeting. Companies must notify shareholders of a meeting date 10 to 60 days ahead of time.

(Additional reporting by Sinead Carew, Tiffany Wu and Kenneth Li in New York; editing by Dave Zimmerman/Andre Grenon)