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Microsoft’s grand internet strategy, it turns out, is still Yahoo, despite walking away from a pursuit of the company two weeks ago.

Microsoft said on Sunday that it “is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo.” Microsoft, however, did not rule out making a takeover offer in the future. (Yahoo’s response was that it has “confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo at this time.”)

What has changed? Well, obviously it was the emergence of Carl Icahn and a proxy fight that is likely to be supported by other large disappointed shareholders of Yahoo.

But, more important, it is apparent that Microsoft doesn’t have much of an alternative plan in its push to challenge Google.

In a memo to employees on Sunday, Kevin Johnson, who runs Microsoft’s online business, acknowledged that “the fact is that we are not where we want to be in this business yet, and we’ve been in this position longer than we’d all like.”

His memo also said that a “major initiative” in search would be announced on Wednesday.

The “alternative transaction” that Microsoft is proposing, according to several reports, is similar to the alliance that Yahoo has been pursuing with Google, one that is expected to be announced this week.

It would be a partnership on ads sold by Microsoft on Yahoo search results. The advantage for Yahoo is that an alliance with Microsoft would be more likely to pass regulatory scrutiny than one with Google, which would tie up 90 percent of the search market.

But a search-advertising deal, while potentially beneficial to Yahoo, is unlikely to dissuade Icahn and other investors who would prefer to get $31 for each of their Yahoo shares.

“Microsoft is trying to get the milk without buying the cow, and if you look at Icahn’s history, he has never been used that way,” someone “familiar with his thinking” told Reuters. “He does not want to see Yahoo pushed into some joint venture with Microsoft and is not going to be used to push Yahoo into it.”

Michael Arrington on TechCrunch says, “whatever happens, it’s clear that Microsoft is very much in the driver’s seat, and Yahoo’s head is spinning.”

“I can’t imagine this can go on for much longer. And frankly, Yahoo’s stockholders and employees deserve some kind of mercy killing at this point.”