Icahn also nominated two candidates to eBay's board of directors. His stake amounts to less than 0.82% of the company.
In a statement accompanying its fourth-quarter results, eBay said it rejected the overture, adding it did not believe breaking up the company was in the best interest of shareholders.
"Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants and shareholders," the company said.
San Jose, Calif.-based eBay said it would consider Icahn's board nominations "in the ordinary course of business."
Amid the disclosure, Wells Fargo Securities analyst Matt Nemer suggested in a Thursday note that eBay should follow the example of John Malone's Liberty Media (LMCA) and consider a tracking stock.
"In our view, a tracking stock structure at eBay would immediately unlock incremental PayPal value, but would protect the meaningful synergies between [the Marketplaces auction unit] and PayPal," Nemer wrote.
Liberty Media has frequently created tracking stocks to reflect the value of its holdings, sometimes spinning them off.
Nemer said that, given the "highly disruptive competitive environments" in both businesses, the units are better as a whole.
"Marketplaces is battling Amazon in the midst of a massive e-commerce channel shift and PayPal is the clear early leader in payments but they play in a field of well-funded innovators," he wrote.
Ebay closed at $54.51 on Wednesday, and was falling 0.59% to $54.09 after being as high as $58.304 in pre-market trading Thursday.
Nemer values PayPal at $25.09, or 24 times non-GAAP earnings per share. His target for ebay as a whole is $73.03.