Reuters quoted a representative of Legg Mason Capital Management, the second-largest Yahoo shareholder, saying the fund managers would prefer a full acquisition over a partial deal. Other vocal shareholders echoed that sentiment.

"We have made no decision on Icahn because we have no information about how he would run the company if Microsoft does not buy Yahoo. Furthermore, the latest developments to sell Yahoo search to Microsoft is unappealing," portfolio manager Robert Hagstrom, told Reuters in an e-mail.

A Microsoft spokesman told me the company would not have a comment Sunday.

Yahoo described the contours of the latest offer and the terms under which it was made, using words not often found in corporate press releases, such as "ludicrous" and "bludgeoned." The company's language addresses specifics of this latest iteration of the deal, but also appears calculated to play up investors' worries about an Icahn-controlled Yahoo.

Yahoo reiterated its willingness to sell the whole company for at least $33 a share before Aug. 1, or negotiate a better deal for just the search business.

According to Yahoo, the latest offer, crafted jointly by Icahn and Microsoft, was made Friday night. The company's board of directors had less than 24 hours to accept, without negotiation on the fundamental terms. (That deadline was disputed by sources close to Microsoft, quoted in The Wall Street Journal, who said Microsoft wanted to finish a deal over the weekend and announce it Monday. The Journal's account also said talks began Thursday.)

Selling Yahoo's search business to Microsoft and the complex restructuring that would result, "would preclude a potential sale of all of Yahoo! for a full and fair price," Yahoo said. It also emphasized the risk and complexity of teasing just the search business out of Yahoo and combining it with Microsoft.

Financial terms, as described by unnamed sources in The Journal, were improved from Microsoft's last search-only proposal. Some of the terms:

-- $1 billion for Yahoo's search business, and guaranteed payments from Microsoft to Yahoo of $2.3 billion for five years;

-- Microsoft would buy $3.9 billion worth of Yahoo stock;

Microsoft and Icahn were asking for the "immediate replacement" of Yahoo's board and the ouster of the management team, something Yahoo said would "destabalize" the company for "the one year it would take to gain regulatory approval for this deal."

It would have left the remainder of Yahoo under the control of Icahn's proposed slate of directors -- who will be up for election in the proxy fight Aug. 1. Yahoo described them as having "virtually no working knowledge" of its businesses.

Yahoo rejected this deal, citing the strength of its existing business and the search-advertising deal it signed with Google last month, after announcing that all talks with Microsoft were off. The Google deal will come under the spotlight on Tuesday when a Senate antitrust subcommittee holds a hearing on it and the online advertising industry. Microsoft General Counsel Brad Smith is one of the witnesses scheduled to testify.

(Check out my colleague Brier Dudley's take on the ramped-up antitrust attention being paid to Google as a result of Microsoft's battle for Yahoo.)

After enumerating Yahoo's reasons for rejecting the latest proposal, Chairman Roy Bostock teed-off on Microsoft and Icahn, calling their alliance "odd and opportunistic."

His statement continued,

"Clearly, Microsoft, having failed to advance in search, is aligning with the short-term objectives of Mr. Icahn to coerce Yahoo! into selling its core strategic search assets on terms that are highly advantageous to Microsoft, but disadvantageous to Yahoo! stockholders. Yahoo's Board of Directors will not allow that to happen. Yahoo!'s Board remains open to any transaction that delivers full value to our stockholders -- we just do not believe such a transaction should be dictated by Microsoft and a single short-term investor."

(Microsoft will reveal just how well its broader online business is faring as part of its fiscal fourth-quarter and full-year earnings report on Thursday. Its strategy will come under the microscope again the following Thursday, July 24, when it holds a day-long business review with Wall Street analysts and top executives.)

Bostock said it would be "ludicrous" to think the Yahoo board could accept the terms of the deal and the manner in which it was proposed.

"While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders," Bostock stated.

He also called Microsoft's insistence that it wouldn't negotiate with current Yahoo management "completely absurd and irresponsible given the complexity of the deal."

This looks like one of the last possible avenues for a deal has turned out to be a dead end. I expect all sides to continue to make noise as they battle for investor hearts and minds in the 18 days before the showdown at the shareholder meeting.