NEW YORK, July 21, 2008 (AFP) - Yahoo agreed Monday to give corporate raider Carl Icahn and two of his allies board seats, ending his fight to oust the board of the Internet giant for its handling of a failed takeover bid from Microsoft.

Under the deal, Icahn, who owns almost five percent of Yahoo shares, agreed to withdraw his slate of nominees for the company's annual meeting of shareholders on August 1, Yahoo said in a statement.

Eight members of Yahoo's current board of directors will stand for re-election at the meeting and one will not.

Following the meeting, the board will be expanded to 11 members, with Icahn appointed to the board and the remaining two seats filled from a list of nine candidates recommended by Icahn.

The US billionaire and activist investor, who owns 4.98 percent of Yahoo shares, has accused the board of botching earlier takeover talks with Microsoft, the world's leading software maker.

Icahn had been trying to convince shareholders to back his slate of board nominees since mid-May.

Microsoft offered to buy Yahoo for 44.6 billion dollars in stock and cash on January 31, but withdrew its offer on May 3, saying Yahoo refused to budge despite a bid sweetened by nearly 50 billion dollars.

Yahoo later tried to revive talks with Microsoft, with Yahoo rejecting an offer to acquire only its search business and Microsoft saying it was no longer interested in buying all of Yahoo.

Microsoft had wanted to buy Yahoo to better battle Google, which claims the lion's share of the multibillion-dollar Internet search and advertising market.

After ending talks with Microsoft, Yahoo announced an alliance with Google to put the Internet search king's expertise to work pumping money from its floundering rival's online advertising.

'I am very pleased that this settlement will allow me to work in partnership with Yahoo's board and management team to help the company achieve its full potential,' Icahn said in the statement.

'While I continue to believe that the sale of the whole company or the sale of its search business in the right transaction must be given full consideration, I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders.'

Yahoo co-founder and chief executive Jerry Yang said the agreement would allow Yahoo 'to put the distraction of the proxy contest behind us' and pave the way for the company to continue pursuing its 'strategy of being the starting point for Internet users and a must-buy for advertisers.'

'This outcome is probably the best that Icahn could have hoped for. Icahn overplayed his hand by trying to negotiate directly with Microsoft before he had enough authority to do so,' said Erick Schonfeld, co-editor of the weblog TechCrunch.

'It appears that realized he couldn't win the proxy fight, and took the opportunity to grab a portion of the board. ... three seats still gives him a strong position from which to agitate for change.'

The proxy war settlement capped bitter and public fighting between Icahn and Yang.

'Yahoo and Carl explain how all the insults they lobbed back and forth at each other for the past few months, and in particular the past few weeks, were all nothing, really, and everything's going to be great now,' Peter Kafka wrote on the online Silicon Valley Insider.

Shares in Yahoo fell 2.5 percent to 21.89 dollars, while Microsoft edged up 0.6 percent to 26.03 in morning trade in New York.