WASHINGTON (Reuters) - Yahoo Inc’s attempt to form an alliance with Google Inc to stave off Microsoft Corp could run into more trouble with antitrust regulators than Microsoft’s unwelcome takeover bid.

Pedestrians walk past the Time Square Yahoo sign in New York April 7, 2008. REUTERS/Joshua Lott

While Yahoo is seeking a business partnership with Google -- unlike the outright merger that Microsoft wants -- legal experts say any deal between the world’s two largest Internet search services will draw heavy scrutiny from U.S. and European competition regulators.

“The Justice Department would certainly want to take a serious look at that because it would mean that a firm that would want to take advertisements or to place advertisements (online) would have only one place to go,” said Aaron Edlin, who teaches law and economics at the University of California at Berkeley.

In recent years, Web search services have taken over from once popular portals or home pages, such as AOL, MSN or Yahoo’s own home page, as the primary starting point for many consumers seeking information on the Internet.

Google held a 59.2 percent share of the U.S. Web search market in February, compared with Yahoo’s 21.6 percent and Microsoft’s 9.6 percent, according to research firm comScore.

To counter that dominance, Microsoft offered in January to buy Yahoo in a cash-and-stock deal now valued at $42 billion.

Yahoo rejects that price as too low and has been casting around for other partners. It announced last week a test to outsource search advertising to Google, which sources say is part of Yahoo’s plans to form a three-way alliance with Time Warner Inc’s AOL to fend off Microsoft.

Antitrust experts said regulators would likely oppose any permanent alliance between Google and Yahoo, while they would likely approve Microsoft’s proposed merger with Yahoo.

“A Yahoo/Microsoft merger would primarily be designed to attack Google,” said Thomas Hazlett, who teaches law and economics at George Mason University in Virginia. “What you’re seeing here is the sort of merger that has ... a plausible efficiency case.”

FRAGMENTED MARKET

While Google dominates search, Yahoo argues the market for online display ads -- the splashy banners or video ads that companies love -- is so fragmented that Yahoo is the biggest player with just 8 percent of the market.

But the proposed cooperation between Google and Yahoo has already prompted congressional concern. The U.S. House of Representatives’ Judiciary Committee announced it would take up the issues in upcoming hearings.

Sen. Herb Kohl, a Wisconsin Democrat and chair of a Senate antitrust panel, said he was watching the Google test.

“Should there be moves to make this agreement permanent, we will examine it closely in the antitrust subcommittee to ensure that it does not harm competition,” Kohl said in a statement.

Kohl expressed concern about the rapid consolidation of formerly independent players in the Web advertising market.

A year ago, Google agreed to buy DoubleClick in a $3.4 billion deal that closed only last month. Microsoft paid $6 billion for aQuantive, Yahoo bought BlueLithium for $300 million and Time Warner Inc’s AOL unit bought Tacoda for an undisclosed amount.

Gregory Sidak, founder of the economic consulting firm Criterion Economics, said U.S. regulators are likely to view the tech market as so dynamic and fast-changing that they will abstain from blocking any particular deal or joint venture in what appears to be an ultra-competitive industry.

But European regulators are generally more likely to act to block mergers than their U.S. counterparts.

“Europe poses a larger antitrust risk for any of the (Yahoo) deals,” Sidak said.

In the absence of certainty, U.S. regulators tend to opt for less intervention rather than more.

The Justice Department, in particular, has a reputation for approving deals that antitrust experts consider suspect, most recently the merger of the only two U.S. satellite radio companies XM Satellite Radio Holdings Inc and Sirius Satellite Radio Inc.

“I think any company contemplating a merger or acquisition would want to get it through during the Bush administration,” said Sidak, expressing a commonly held view in the legal community that, even if Republican nominee John McCain wins the 2008 election, there will be stricter controls.

“Even if McCain is elected, I think there’s reason to believe they’ll be some tightening of antitrust enforcement,” he said.

Evan Stewart of law firm Spaeder Zuckerman LLP predicted that, when the dust settled on the various deal scenarios, Yahoo would lose its fight to stay independent, a view widely shared among Wall Street investors betting on the outcome.

There are “very creative investment bankers providing Yahoo with all these very different end-games,” he said. “If you’re hooked, eventually you’re going to be dragged into the boat.”