A Microsoft deadline for Internet service company Yahoo to accept its 44.6 billion-dollar (28.5 billion-euro) acquisition offer expired at midnight Saturday, setting the stage for a hostile takeover bid by the software giant.

The expiration of the Sunday 0700 GMT deadline -- without comment from either side -- was likely to pave the way for an ugly proxy battle -- a fight by Microsoft for a vote by Yahoo shareholders to place pro-Microsoft officials on its board of directors.

In an open letter to the Yahoo board of directors on April 5, Microsoft chief executive Steve Ballmer gave the Internet pioneer three weeks to accept the 31 dollars-a-share takeover offer or face a proxy fight.

Ballmer also warned that any further delays could result in a less attractive offer for Yahoo.

But Yahoo's board of directors has said the offer "substantially undervalues" the California firm, insisting the company is worth at least 40 dollars a share.

Microsoft is eager to merge the two companies' resources to take on Google, which dominates the lucrative Internet search advertising market which is expected to grow to 80 billion dollars annually worldwide in the next two years.

Founded by Jerry Yang and David Filo in 1994, Yahoo is a distant second in that market to Google, which would still hold an impressive lead over a combined Microsoft-Yahoo entity.

Microsoft chief financial officer Chris Liddell said Thursday that the US software giant is standing by the April 26 deadline.

"With respect to Yahoo we have been clear: speed is of the essence," Liddell said.

"The idea we should increase our bid just because we can afford to is not one that I favor. Unless we make progress with the Yahoo board by this weekend, we will explore our alternatives."

Liddell's comments echo those made by Ballmer earlier in the week.

"We have a strategy for the Internet that we are very excited about," Ballmer said. "We think we can accelerate our strategy by buying Yahoo and we will pay what makes sense for us to pay for our shareholders."

Microsoft's options also include withdrawing its offer, a move that could outrage Yahoo shareholders who have seen Microsoft's offer sharply push up Yahoo's share price.

Some have threatened to sue Yahoo's board for failing in its duty to maximize the value of their investment.

To avoid Microsoft's clutches, Yahoo has sought a strategic tie-up with a "white knight," reportedly examining possible alliances with social networking website MySpace, owned by Rupert Murdoch's News Corp., and with Time Warner's faded Internet star America Online.

Yahoo even tested letting Google handle placing online advertising on Yahoo's own search pages to determine whether it generates more money than Yahoo's new Panama online ad platform.

Analysts believe that Google only benefits while Yahoo and Microsoft are distracted by the takeover quest.

"Yahoo has a hard decision to make," Silicon Valley analyst Rob Enderle told AFP. "They have to call Microsoft's bluff and if Microsoft isn't bluffing and this goes hostile, it is going to be expensive for both companies."

Yahoo posted unimpressive earnings in the first three months of this year, indicating to Enderle and other analysts that Microsoft's offer of 31 dollars per share is too high and that Ballmer might simply walk away from a deal.

But other analysts believe Microsoft will increase its bid slightly late in the game -- though nothing near the 40 dollars per share desired by Yahoo's board.

On Thursday, Microsoft reported that its profits slipped to 4.38 billion dollars in the first three months of the year despite revenues rising slightly to 14.45 billion dollars.

The world's biggest software company reported earnings of 47 cents per share -- topping financial analysts' predictions by two cents but lower than the 50 cents per share, or 4.93 billion dollars, posted in the same quarter a year earlier.