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Microsoft and News Corp are in talks about a joint bid for Yahoo that would add MySpace to a proposed Microsoft-Yahoo combination.
But Yahoo was in talks to merge with Time Warner's AOL unit, a source said, after Yahoo announced yesterday a test to use rival Google's web search service - a three-way option to try to extract a higher Microsoft bid or stay independent.
Microsoft has said it will launch a hostile bid for Yahoo and could lower its offer in three weeks if it does not get a deal from Yahoo, which says it is worth more.
