Microsoft, which offered $47.5 billion for Yahoo, had enlisted director nominees for a possible hostile bid. Its law firm, Sullivan & Cromwell, sent memos to 10 potential directors and some alternates, releasing them from their contracts, said the person, who asked to stay anonymous because the agreements were confidential.

The world’s biggest software maker had sought the acquisition to shore up Internet-advertising sales, a market dominated by Google Inc. The talks fell apart on May 3 after Yahoo Chief Executive Officer Jerry Yang demanded $37 a share. Microsoft CEO Steve Ballmer was willing to pay $33.

Microsoft may return to talks later, according to shareholders such as Bill Miller, the Legg Mason Inc. fund manager whose investments lost 20 percent in the first quarter.

Microsoft fell 17 cents to $29.10 at 9:30 a.m. New York time in Nasdaq Stock Market trading. Before today, the stock had dropped 18 percent this year. Sunnyvale, Calif.-based Yahoo’s shares declined 20 cents to $26.02. Yahoo spokeswoman Tracy Schmaler didn’t have a comment. The Wall Street Journal reported the move earlier yesterday.

Some investors and analysts had said the two companies would eventually reconcile because of a mutual need to compete with No. 1 search engine Google in the $41 billion online advertising market. Yahoo and Microsoft rank second and third in Internet searches.

“There will be a transaction done at the end of the day,” Larry Haverty at Gamco Investors Inc. in Rye, New York, said in an interview this week. “It is the only way either company can cope with Google.”

Both companies have lost market share in Internet searches to Google, even after billions of dollars in acquisitions to add technology and advertising programs. Google handled 59.8 percent of U.S. search queries in March, up from 48.3 percent a year earlier, according to market research firm ComScore Inc. in Reston, Va.

Yahoo’s share of U.S. search queries fell to 21.3 percent in March from 27.5 percent a year earlier. Microsoft, which would have tripled its search traffic by acquiring Yahoo, captured 9.4 percent, down from 10.9 percent the year before.