NEW YORK (Reuters) - Yahoo Inc said on Wednesday it will extend the deadline for nominating directors to its board, seeking more time to explore alternatives to a $41 billion buyout offer from Microsoft Corp.

The deadline for nominations will be extended from March 14 to 10 days following the announcement of the date for Yahoo's annual shareholders' meeting, the company said. It has not announced a date for the shareholders' meeting.

The original deadline could have catapulted Microsoft and Yahoo into a proxy contest within less than two weeks from now. Yahoo shares rose 0.5 percent to $28.19 in early trading, while Microsoft gained nearly 1 percent to $27.85.

While the extension does not stop Microsoft from nominating directors, it gives Yahoo some breathing space, Yahoo Chief Executive Jerry Yang said in a letter to employees filed with the Securities and Exchange Commission.

"In light of the current circumstances, this change removes an imminent deadline," Yang said. "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."

The move by Yahoo, which had rejected Microsoft's offer saying it undervalued the company, follows a New York Times report on Wednesday that Yahoo was looking to delay its annual meeting to give it time to look for alternatives.

Since Yahoo's shareholder meeting was on June 12 last year it could be forced to hold its 2008 meeting by about mid-July as Delaware law allows companies to wait up to 13 months between annual meetings.

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

Earlier in the day the Wall Street Journal reported that Yahoo and Time Warner Inc had stepped up talks aimed at creating an alternative to the Microsoft deal.

(Reporting by Sinead Carew and Tiffany Wu, editing by Gerald

E. McCormick and Dave Zimmerman)