BOSTON/NEW YORK (Reuters) - Microsoft Corp and Yahoo Inc are making last-minute efforts to seal a deal before Microsoft takes its Yahoo bid hostile or abandons it altogether, sources familiar with the matter said on Friday.

The Times Square Yahoo sign is seen in New York April 7, 2008. REUTERS/Joshua Lott

Microsoft may raise its offer, now worth $42.2 billion, by a few dollars per share from an initial $31 per share to complete a deal as soon as this weekend, a person familiar with Microsoft’s thinking said.

But talks are at a “sensitive stage” and a deal is not certain, sources familiar with the situation said.

Investors bet an agreement was likely, sending Yahoo shares up 7 percent to $28.67 on the first news of significant contact between the sides since Microsoft’s deadline for its initial offer expired last Saturday.

“My sense is Microsoft is considering raising their price to the mid-$30s,” said a San Francisco-based portfolio manager who owns both Yahoo and Microsoft shares, but would not be identified due to a company policy regarding shares that are actively traded.

Yahoo had previously refused to enter formal negotiations with Microsoft, saying the initial price it made public in February did not properly value Yahoo’s search and display advertising technology, or its overseas holdings.

Every dollar added to the per-share price amounts to about $1.4 billion extra for the total deal at current prices, and Microsoft shareholders have questioned how much higher the company should go.

“If it’s $35 or less, I think it’s fine,” said the portfolio manager, whose company owned 21.2 million shares of Microsoft and 1.93 million Yahoo shares as of the end of December.

NO QUICK EMBRACE

A deal could give Microsoft a stronger foothold in its battle with Internet search leader Google Inc, which is rapidly expanding into the software maker’s own turf with new Web-based applications.

Microsoft Chief Executive Steve Ballmer indicated on Thursday he might sweeten the bid after weeks of saying publicly that his offer was fair as it stood.

“I know exactly what I think Yahoo is worth to me, exactly,” Ballmer said at a meeting with Microsoft employees. “I won’t go a dime above, and I will go to what I think it’s worth if that gets the deal done.”

Yahoo executives have repeatedly said the company was not averse to a deal with Microsoft at a higher price.

But in a sign of its reluctance, Yahoo has courted a possible deal with Time Warner Inc’s AOL division and a search advertising partnership with Google.

Yahoo is still in talks on an alternative to the Microsoft bid, sources familiar with the matter said on Friday.

For its part, Microsoft has made clear it will not wait much longer. Ballmer said on Thursday that walking away was one of three options, along with striking a friendly deal or launching a hostile bid, and to expect an announcement shortly.

Microsoft shares fell 0.5 percent to close at $29.24. Yahoo shares closed at $28.67, up nearly 7 percent on the day.