Microsoft and News Corp are seriously considering pairing up for a joint run at Yahoo, according to both the Wall Street Journal and the New York Times.

News Corp could kick in the Fox Interactive Media unit along with MySpace and some cash and Microsoft would throw in MSN. Such a deal would let Microsoft raise its bid for Yahoo, the Times said.

The paper described the talks as being at “a sensitive stage” and a ways away from anything definite. News Corp could of course always turn around and do a deal of its own with Yahoo.

Meanwhile, someone whispered in the Journal’s ear that Yahoo and AOL are on the threshold of a deal that would fold AOL into Yahoo and see Time Warner make a cash investment in the combined entity in return for about 20% of the place. AOL, without its dwindling dial-up business, would be valued at about $10 billion and Google, of course, owns 5% of AOL.

Then the idea is for Yahoo to use Time Warner’s money to buy back a few billion dollars worth of stock for somewhere between $30 and $40 a share to pacify investors watching Microsoft and its money walk out the door.

That was after Yahoo said last night that it’s going to experiment with letting Google deliver ads alongside Yahoo’s search results to test the revenue potential of an outsourcing arrangement apparently to substantiate that it’s worth more than Microsoft’s offer.

Microsoft’s chief counsel Brad Smith immediately branded the unholy alliance anti-competitive and the chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition and Consumer Rights Herb Kohl raised an eyebrow and indicated he would be watching where the test led.

In a statement Smith said, “Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo.”

He then added, “We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers and consumers.”

Over the weekend Microsoft delivered an ultimatum to Yahoo giving it until April 26 to come to terms or suffer a proxy fight for control of its board. Microsoft also threatened to lower its bid. Yahoo’s retort was to ask for more money.

Yahoo says the Google test will apply only to traffic from yahoo.com in the US, last up to two weeks and be limited to no more than 3% of Yahoo search queries.

Yahoo and Google trotted out such a scheme as a possible hidey-hole for Yahoo to crawl into to avoid takeover by Microsoft right after Microsoft went public with its offer two months ago.

It was dismissed as impossible because of the antitrust issues.

The original negotiations, which pre-date Microsoft’s bid, were about outsourcing search advertising in Europe to Google. It’s been estimated that Yahoo could increase its cash flow 25% by outsourcing all its search ads to Google.

Yahoo said Wednesday that it’s exploring strategic alternatives to maximize shareholder value and that “the testing does not necessarily mean that Yahoo will join the AdSense for Search program or that any further commercial relationship with Google will result.”

It also said it “would not comment on the nature or timing of any potential relationship.”