(Adds detail on share sales)

By Alexei Oreskovic

SAN FRANCISCO, July 15 (Reuters) - Yahoo Inc pledged to pay its shareholders at least half the proceeds from Alibaba Group Holding Ltd's (IPO-BABA.N) mega-IPO this fall and plans to keep a larger stake in the Chinese e-commerce company than expected.

Yahoo's roughly 24 percent stake in the world's largest Internet retailer is viewed on Wall Street as its most prized asset. On Tuesday, it said Alibaba had agreed to reduce the number of shares Yahoo is required to sell in the IPO to 140 million shares from 208 million previously.

That news helped offset the U.S. company's disappointing results on Tuesday. Yahoo also forecast third-quarter net revenue, excluding fees paid to partner websites, of $1.02 billion to $1.06 billion, less than the $1.1 billion Wall Street analysts had expected on average.

"What you see is the fundamentals at core Yahoo continue to deteriorate, but there's at least some good news on the Alibaba front," said Macquarie Research analyst Ben Schachter.

"The idea is that Yahoo shareholders can participate and benefit from the upside to Alibaba post the IPO, as opposed to just having to sell more stock in the IPO."

Alibaba is expected to list its shares on the New York Stock Exchange later this year in what could be the largest ever U.S. technology initial public offering. Investors have valued the company, which handles more e-commerce than Amazon.com Inc and eBay Inc combined, at as much as $200 billion.

Finance Chief Ken Goldman said in a statement accompanying Yahoo's results on Tuesday that the company was committed "to return at least half of the after-tax IPO proceeds to shareholders."

Yahoo is trying to revitalize a stagnant online advertising business as Chief Executive Marissa Mayer marks her 2-year anniversary at the Internet company.

The former Google Inc executive has revamped many of Yahoo's Web products but its ad sales are still weak while rivals such as Google and Facebook Inc continue to post strong, double-digit revenue growth.

Yahoo's net revenue, which excludes fees paid to partner websites, decreased 3 percent year-on-year to $1.04 billion in the three months ended June 30. Analysts polled by Thomson Reuters I/B/E/S were looking for net revenue of $1.084 billion.

Revenue in Yahoo's display advertising business decreased 8 percent to $436 million in the second quarter. The average price per ad decreased 24 percent, while the number of display ads sold increased 24 percent.

Shares of Yahoo were barely changed at $35.57 in after-hours trading.

(Reporting by Alexei Oreskovic; Editing by Richard Chang)