"After careful evaluation, the board believes that Microsoft's proposal substantially undervalues Yahoo including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments," Yahoo said in a statement.
As a result, the board "concluded that the proposal is not in the best interests of Yahoo and our stockholders."
Microsoft told AFP on Monday it "has no comment at this time."
On February 1, Microsoft unveiled what it called "a generous" offer to take over Yahoo, in an effort to merge the world's biggest software company with a major Internet player to take on search and advertising juggernaut .
Microsoft proposed 31 dollars per share, a 62 percent premium above Yahoo's closing price a day earlier.
Yahoo's share price climbed in the wake of the offer, and on Monday was up 1.48 percent at 29.63 dollars around 1755 GMT.
Wording of the rejection by Yahoo suggests that the company is holding out for a better price, and guarding against potential lawsuits from stockholders, according to analysts.
"Right now they are haggling,"analyst Rob Enderle told AFP. "Yahoo is not saying no at any price. They are saying the Microsoft offer is not strong enough."
It is common for companies to rebuff initial buyout offers and hold out for sweeter deals.
"Microsoft can now up the bid, or they can move to replace the board," Enderle said.
A hostile bid by Microsoft to take over Yahoo would involve themaking offers directly to stockholders and maneuvering to replace Yahoo's board members at an upcoming March election.
Analysts atsaid the rejection of the Microsoft bid signals that there is no sign of interest from competing bidders and that negotiations have entered a "counteroffer stage."
Yahoo is said to believe the California company is worth closer to 40 dollars per share, a price that would bump up the cost to Microsoft by billions of dollars.
Microsoft, based in the northwest US state of Washington, says it is prepared to tap into financial markets and leverage a buyout for the first time since it was founded in 1975.
Microsoft believes a combination of the companies would lead to cost savings of a billion dollars per year.
But Yahoo chief executivesent a message to employees last week, assuring them the firm's leaders were exploring ways to avoid a .
"Our board is thoughtfully evaluating a wide range of potential strategic alternatives in what is a complex and evolving landscape," Yang wrote in the email.
Microsoft's effort as an attack on the independence of the Internet.meanwhile has condemned
"Microsoft's hostile bid for Yahoo raises troubling questions," Google's chief legal officer David Drummond said in a written statement.
"This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: openness and innovation."
Analysts say the goal of the takeover is to better compete with Google, whose dominance of Internet advertising, backed by its powerful search engine technology, has come at the expense of Microsoft and Yahoo.
Microsoft, they say, hopes that by taking over Yahoo it will expand its own presence in online advertising and, using Yahoo's popularity and technology, ratchet up its own competitiveness overall in Internet services.
Reports surfaced Monday that options being considerd by Yahoo include merging with faded Internet star( ), now owned by .
Yahoo could also outsource online advertising to Google, a proven master of that business.