AOL would be merged with Yahoo to give the search company proof it needs that it can grow independent of a takeover; Microsoft would buy AOL outright and use it to expand its ad influence as well as give it more web traffic, according to the report.

Yahoo would particularly stand to gain from the deal. The firm faces an August 1st shareholders meeting that may see its directors voted out if unable to convince investors that it can perform well without a Microsoft deal, which potential usurper and investor Carl Icahn claims is necessary for Yahoo's success.

For Microsoft, the Yahoo deal would serve either as a complement or alternative to a Yahoo deal and is considered important to competing in search ads, where Google holds a clear lead.

None of the involved companies were able to comment on the claims.