Old news was bad news for

Yahoo!

(YHOO)

Monday.

Shares in the Internet bellwether slid after getting hit by a snowballing news report to the effect that

Microsoft

(MSFT) - Get Report

is developing its own search technology.

Because Microsoft is the biggest third-party distributor of the paid search engine developed by Yahoo!'s recently acquired Overture Services unit, the implication that Microsoft would be dumping Overture sent Yahoo's shares tumbling in the afternoon.

But since Microsoft's eventual independence was already widely expected, and since Monday's reports didn't appear to indicate a quicker-than-expected timetable for Microsoft's home-grown search technology, the market's reaction to Monday's news seemed overblown.

Shares in Yahoo! -- possibly weakened, like other net stocks, by a sectorwide downgrade from Merrill Lynch -- closed at $40.36 Monday, down $1.27, or 3%. Shares traded as low as $38.68 in the afternoon, dropping more than $1.50 in a half hour.

At the center of the whole episode was a

CNBC

report Monday in which Microsoft Chief Technology Officer Craig Mundie spoke about the software giant's efforts to develop its own search technology. "We made the decision about a year ago that we had too much dependency on external parties for the search technology we use in our Web service and MSN-related things," Mundie said, according to Bloomberg's quote from the report. "We made a commitment to increase our investment in our own search technologies to use in the future."

That interview was distilled into a 1:22 p.m. Bloomberg headline that read, "Microsoft Leaving Yahoo!, Search Engine Partnerships, CNBC Says."

Despite the urgent-sounding nature of that headline, the

CNBC

report didn't appear to put a timetable on Microsoft's departure. And without such a deadline, that news is pretty much old news, as far as the market is concerned.

Speculation that Microsoft would be exiting its relationship with Overture began as soon as Yahoo!'s deal to acquire Overture was announced earlier this year. Previously, Yahoo! and Microsoft were Overture's two largest distribution partners, but with Yahoo! and Overture under the same roof, Microsoft's partnership with Overture would mean funnelling business to one of its key rivals in the Internet portal market.

In the meantime, signs that Microsoft has been beefing up its own search technology have been unmistakeable. It came out a few weeks ago, for example, that Microsoft had hired Paul Ryan, formerly Overture's chief technology officer.

Yet Microsoft has also indicated that as it builds up its own search capabilities, it's not going to make a face-spiting nose cutoff by prematurely dropping Overture and its attendant revenue. In fact, Microsoft announced last month that

it was extending current agreements with Overture through mid-2005.

Separately on Monday, Merrill technology strategist Steven Milunovich downgraded the Internet sector in his TechStrat Sector Model. In Milunovich's model, updated monthly, Internet and hardware sectors went from equal weight to underweight, and wireless went from overweight to equal weight. Semi, supply chain and software were upgraded.

Yahoo!'s fellow Internet bellwethers,

Amazon.com

(AMZN) - Get Report

and

eBay

(EBAY) - Get Report

, also declined in in the generally down market Monday. Amazon.com fell $2.09 to $50.36, and eBay fell $1.10 to $53.28.