Updated from 12:46 p.m. EST

Worries about big-customer dependence have dogged

Overture Services

(OVER)

shares for more than a year. But Wednesday morning they tore into the stock, sending it down almost 20% before an afternoon recovery.

SoundView Technology analyst Jordan Rohan downgraded the pay-per-click search engine company on Wednesday, cutting its price target from $20 to $6. Rohan said evidence indicated

Microsoft

(MSFT) - Get Report

was developing its own paid search technology to replace the paid links Overture is providing to Microsoft Web properties.

The often-volatile stock plunged below $12 before Overture and Microsoft shot down the report. "We think this is a relationship that is not broken, and it's something that doesn't need to be fixed," said Bob Visse, director of marketing for Microsoft's MSN-branded portals and Internet service provider.

Still, given that Overture derived 60% of its revenue last year from agreements with its two largest partners, Microsoft and

Yahoo!

(YHOO)

, the report fueled long-running investor suspicions that Overture -- a clear-cut operational success in a weak online advertising environment -- is being squeezed by the companies on whose Internet properties Overture's paid search-engine listings appear.

Overture's shares got hammered on what was otherwise a generally positive day for the markets, sliding $1.11, or 7%, to $14.12. Overture's shares traded mostly in the $20 to $30 range in 2002, and traded as high as $31.19 in January.

Tectonic Shift?

In his report, Rohan says that Microsoft is "significantly" increasing its investment in search technology. That view, writes Rohan, has received a "very strong" endorsement from Microsoft senior executives, including CEO Steve Ballmer. The shift was also confirmed by a Microsoft internal memo, says Rohan, though he didn't discuss the specific content of any memo in his Wednesday report. Microsoft is tripling the staff associated with search, says Rohan.

The upshot, says Rohan, is that he believes Microsoft will be developing its own paid search technology, perhaps by the end of 2004, when Overture's current contract to supply paid search listings to Microsoft's MSN.com service expires. Rohan cut his rating on Overture from neutral to underperform; his firm hasn't done investment banking for the company.

"We believe SoundView's report is simply wrong, based on our ongoing communication with Microsoft," said Overture in a statement. "The fact is we have a strong and growing relationship with Microsoft, which was demonstrated earlier this week with a new search agreement for Korea. We have agreements with MSN in the U.S., Canada, the U.K., Germany, France and Japan." Overture reiterated that its agreements run through the end of 2004 for the MSN.com site, and through the end of 2003 for the window that pops up when users of the Internet Explorer browser click on the "search" button in their toolbar.

MSN's Visse said Rohan's report was correct in reporting that Microsoft was making investments to improve its customers' search experience. But though he wouldn't specify exactly the areas of search in which the company is investing, Visse said paid search wasn't one of them."The Overture partnership provides a lot of value for MSN," said Visse. "They've done a great job creating a market."

"I believe my sources are good," Rohan told

TheStreet.com

. "I verified this multiple times, as has our analyst who covers Microsoft."

Far-Reaching

Bolstering his thesis, says Rohan, is Microsoft's continuing practice of negotiating deals with Overture that are less than two years in length. The Internet Explorer search pane element of the new Korea deal, for example, expires with similar deals in nine months. (That quick expiration could be explained by Microsoft's desire for a convenient negotiation schedule rather than a lack of long-term commitment.) "Microsoft is setting itself up to move to its own internally developed solution, if the internal solution proves successful," says Rohan.

If Overture were to lose Microsoft or Yahoo! as search partners, says Rohan, the effect on Overture would be huge. If the pay-per-click revenue derived from the two online giants was excluded from Overture's results for the fourth quarter of 2002, says Rohan, Overture would have lost 35 cents per share on revenue of $68 million rather than earning 24 cents per share on revenue of $200 million.