Google and Yahoo! have announced a search engine marketing agreement through which Yahoo! will be able to display contextual ads from Google alongside its own results.

The deal will also see Yahoo! able to show these ads on its own websites, as well as those belonging to partners, in the US and Canada. The firm will choose the search query terms for which it may provide Google paid search listings, it said.

Another component of the agreement will be increased interoperability between Google and Yahoo!’s respective instant messaging programs.

"We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry," commented Yahoo! chief executive and co-founder Jerry Yang.

"Our strategies are specifically designed to capitalise on this convergence – and this agreement helps us move them forward."

Yahoo! also revealed this week that talks between itself and Microsoft have come to an end. The negotiations had focused on the possible full or partial acquisition of Yahoo! by Microsoft.

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