In joining forces with Icahn, Microsoft sweetened the terms of a proposal to control Yahoo's search business after withdrawing its offer in May to buy the whole company.
The improved terms included $2.3 billion (1.15 billion pounds) in guaranteed annual revenue from search advertising for five years, with the option to extend the deal for another five, according to the sources, who asked not to be named.
The deal would also have carried a minimum annual payment of $1.6 billion for the subsequent five years, The Wall Street Journal reported on Sunday, citing sources.
Previously, Microsoft had sought an exclusive, 10-year search ad agreement with Yahoo and had offered guarantees for only three years, a source told Reuters in June.
It remains unclear whether Microsoft had previously put a revenue guarantee amount on the table.
On Saturday Yahoo rejected the joint proposal, which would have given Microsoft its search business and left Icahn, who owns nearly 5 percent of Yahoo, in charge of the remaining company.
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