NEW YORK (Reuters) - Microsoft Corp Chief Executive Steve Ballmer said a Web search advertising deal with Yahoo Inc makes economic sense and may still be possible, though the two sides are not in any discussions.

Shares of Yahoo jumped 12 percent on the news, as investors hoped Ballmer's comments could lead to the two sides returning to the negotiating table. The share gains were pared back to about 10 percent after Microsoft issued a statement saying it had no interest in buying Yahoo.

Talks between Microsoft and Yahoo broke off in July after the Web company rejected Microsoft's proposal to buy its search business and enact a revenue-sharing partnership.

Yahoo had also rejected a full acquisition bid from Microsoft in May that was priced at $33 per share. Instead, Yahoo signed a search advertising pact with Web leader Google Inc, which is being scrutinized by regulators.

"Perhaps there will continue to remain opportunities to partner around search," Ballmer told a Gartner Inc conference in Orlando, Florida.

"We are not in any discussions with them. We'll see. They want to remain independent. There are probably still opportunities around search. I think it would still make sense economically for their shareholders and ours."

Since talks broke off, Yahoo shares have plunged to a 5-1/2-year low of $11.37, weighed by concerns over the outlook for Web display advertising, as major advertisers such as banks and automakers cut back spending.

"We offered 33 bucks not too long ago and it's 11 and a half. So I don't know what price might have got the job done," Ballmer said, responding to a question from Gartner analyst David Smith on whether Microsoft might take another stab at buying Yahoo now that its stock price is so low.

"It's clear that Yahoo did not want to sell the company. It did not want to sell when we offered 33 ... They probably think it's worth at least 33 today."

Yahoo declined comment. Its shares rose to as high as $13.73 on Thursday, before settling at around $12.99 in afternoon trading on the Nasdaq.

"Our position hasn't changed. Microsoft has no interest in acquiring Yahoo; there are no discussions between the companies," a spokesman for Microsoft said in a statement.

Microsoft shares were up 1 percent at $22.87.

(Reporting by Anupreeta Das in New York, with additional reporting by Jim Finkle in Boston; writing by Tiffany Wu; editing by Gunna Dickson and Gerald E. McCormick.)

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