Google-Yahoo! Deal Hits Snag in Europe

SAN FRANCISCO -- A search deal between Yahoo!(YHOO Quote) and Google(GOOG Quote) now faces the scrutiny of European regulators, casting new doubt on its prospects.

The European Union is known for its tough anti-trust stance, which has resulted in fines against Microsoft(MSFT Quote) in the past. If regulators decide to formally challenge the Yahoo!-Google deal, that could result in a delay of up to a year, or even a collapse of the search deal altogether.

On Tuesday, Google issued a statement in response to the European Union's probe: "The agreement is limited in scope to Yahoo's U.S. and Canadian websites, and it will not have any significant effect on Europe. We are of course co-operating with the Commission and are confident that they will reach the same conclusion."

Yahoo! also emphasized its cooperation with regulators in its own statement: "Yahoo! has been and will continue to work with the relevant regulatory agencies to provide officials with the necessary information about this business agreement, which we believe will strengthen competition in search and make advertisements more relevant for our users."

Yahoo! reached the search deal with Google in June as a way to stave off a Microsoft takeover. The arrangement allows Yahoo! to outsource some of its online ads that run along its search engine to Google, which in turn shares the revenues generated from the ads with Yahoo!.

Yahoo! has touted the plan as a major revenue driver, potentially generating $800 million a year in sales. Without it, the company would have a hard time justifying to shareholders why it had turned down Microsoft's offer to purchase the company for $33 a share earlier this year. It could also put pressure on Yahoo! to bring Microsoft back to the table for a new round of talks.