Yahoo! has rejected Microsoft's three-week ultimatum to accept a takeover offer, claiming that they have been undervalued.

In an open letter to Microsoft chief executive Steve Ballmer, Yahoo said that they would only be open to a better deal.

"We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders," Roy Bostock, chairman of Yahoo's board and Jerry Yang, its chief executive officer said in the letter.

"Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo", they added.

On February 1st Microsoft first announced its bid for Yahoo! at $31 per share, or $44.6 billion in total.

Mr Ballmer said in a letter posted on Microsoft's website: "We believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement."

In March, Google chief executive officer Eric Schmidt said that the reported deal between the two internet giants would "be bad for the internet".

He raised concerns about Microsoft's practises in the past and the potential future problems, saying that Google "are concerned that there are things Microsoft could do that would be bad for the Internet".