Yahoo! and Goldman Sachs, its Wall Street adviser, are understood to have scheduled the whole of the July 4 public holiday in the US, which begins tomorrow, engaged in talks with Time Warner.

It is understood that while discussions with Time Warner, the cable company, are informal, talks will be active throughout the weekend.

The internet search engine is seeking to construct a deal to defend itself again from an onslaught from Microsoft, before Yahoo!'s annual general meeting on August 1. Yahoo! is understood to be discussing with Time Warner the feasibility of merging with AOL, the cable company's internet business, in a deal worth around $10 billion.

It emerged this week that Microsoft is also in talks with Time Warner to devise a means of breaking up Yahoo! so that the software company can seize control of the internet company's search engine.

Microsoft is still smarting from being forced to walk away from its revised $47.5 billion offer to buy Yahoo! at the end of May, and of failing to construct a subsequent joint venture deal with Yahoo!.

Microsoft had sought to do a deal with Yahoo! so that it could better compete with Google, the largest internet company in the world, and capture a bigger share of the $40 billion a year online advertising market.

It is believed that Microsoft also this week approached Carl Icahn, the billionaire activist investor who is seeking to oust the entire Yahoo! board at the company's annual meeting in three weeks. Mr Icahn is angry that the Yahoo! board rejected two bid approaches for the company without allowing shareholders to vote on such a move.

Jerry Yang, the co-founder of Yahoo!, is keen to be able to present a feasible alternative to any deal offered by Microsoft and Mr Icahn's demands by the time that Yahoo!'s shareholders meet to vote on the re-election of the board at the beginning of August.

The last offer, made by Microsoft in May, valued Yahoo! shares at a 72 per cent premium, or $33 a share. Yesterday Yahoo! shares were trading up 2 per cent at $21.35 each.

Yahoo! declined to comment. Mr Icahn and Microsoft failed to return calls yesterday.

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