Yahoo's shares plunged 20% in early trade in New York after software giant Microsoft scrapped its three-month-old bid to buy the internet firm.

The deal collapsed after the two sides could not agree on the sale price.

Microsoft boss Steve Ballmer formally withdrew the offer in a letter this weekend to Yahoo's head, Jerry Yang.

Yahoo stock slid 19.7% to $23.03, erasing a big chunk of the 50% gain made since Microsoft made its initial takeover approach on 1 February.

In trading in Frankfurt, Yahoo's shares were down 20.2% at 14.45 euros ($23.17) by lunchtime.

Analysts said Yahoo must come up with some answers about what it would do next.

"Mr Yang is certainly under a lot of pressure now," said Roland Hirschmueller, an equities trader at German brokerage Baader.

"His days are numbered, if he doesn't manage to come [up] with an alternative strategy," he added.

Legal action

Mr Ballmer, Microsoft's chief executive officer, said the firm had raised its original offer from $44.6bn to $47.5bn (?24.1bn) - $33 per share.

But he added that Yahoo had insisted on at least $53bn, or $37 a share - which was more than Microsoft was prepared to pay.

Analysts said Yahoo could face legal action from shareholders after rejecting the bid.

Microsoft had wanted to do a deal to be able to compete with Google, which dominates the lucrative market for internet advertising.

This market was worth $40bn in 2007 and is predicted to double to $80bn by 2010.

In his letter to Yahoo's chief executive Mr Yang, which was posted on the Microsoft website, Mr Ballmer said: "We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo and the market as a whole.

"Despite our best efforts, including raising our bid by roughly $5bn, Yahoo has not moved toward accepting our offer."

"After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."

Mr Ballmer also told Yahoo's boss that he would not pursue his original plan B of launching a hostile takeover battle, because Mr Yang would "take steps that would make Yahoo undesirable as an acquisition for Microsoft".

Mr Ballmer told his own employees that Microsoft could achieve its goals without Yahoo, albeit at a slower pace.

Yahoo maintained that Microsoft had offered too little to buy the company.

In a statement issued after Microsoft's withdrawal, Yahoo chairman Roy Bostock dismissed the unsolicited bid as a "distraction".