Shares in the Silicon Valley group sank more than 16 percent in late morning trade, while Microsoft saw a rally of more than two percent.

On Saturday, Microsoft yanked its proposal, saying the struggling Internet pioneer refused to budge despite the software giant upping its offer to nearly 50 billion dollars.

Talks aimed at resolving corporate dueling that began with Microsoft's offer on February 1 to buy Yahoo for 31 dollars per share ended with the two firms unable to close a multibillion-dollar gap in price expectations.

Jeffrey Ham, analyst at Briefing.com, said Yahoo shares were under pressure "as confounded investors try to assess the company's muddled future."

Ham added: "Without a merger or distinct strategic alternatives, Yahoo will most likely continue to lag a more innovative and faster growing Google."

Yahoo chief executive Jerry Yang said the company can move forward without the distraction of a takeover bid.

"With Microsoft's withdrawal, we'll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders," Yang said in a blog on Yahoo's website.