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Shares of Yahoo Inc. rose sharply in early trading Tuesday as investors saw CEO Jerry Yang's decision to step down as a possible indicator that the company is leaning toward reopening takeover negotiations with Microsoft Corp.

Mr. Yang surrendered the post Monday night after just 17 months on the job. He was brought in by the board as a means of returning the Sunnyvale, Calif., company to its days as a high flying dot-com darling; however, he was often criticized for failing to deliver on that initial promise.

The company's search engine continues to cede ground to market leader Google Inc. and despite rolling out a series of new services and initiatives, Mr. Yang's efforts have not reinvigorated the company's flagging stock price. Yahoo now faces a worsening economy that threatens to eat into the company's core display-advertising business.

Mr. Yang's difficulties were compounded by shareholders who blame the Yahoo co-founder for the collapse of Microsoft's attempted $47.5-billion (U.S.) takeover bid last May.

Yahoo's shares jumped nearly 12 per cent in morning trading on the Nasdaq stock market to $11.92. Still, the company's stock is down 60 per cent from its 52-week-high of $30.25, reached two weeks after Microsoft made its move to purchase the company. Yahoo's stock bottomed out at $10.34 last week, a level not seen since 2003.

Over the past several months, Mr. Yang and other Yahoo executives have scrambled to find ways to prove to investors that the company was headed in the right direction and could go it alone without Microsoft.

Yahoo brokered an ad-sharing partnership with rival Google, only to watch Google walk away when the U.S. Department of Justice indicated it would seek to block the deal over antitrust concerns.

There have also been rumours of a possible takeover or merger with Time Warner Inc.'s AOL business, but investors see Mr. Yang's abdication of the throne as one of the strongest indicators yet that major changes are under way at Yahoo and that the company could be set to return to the bargaining table with Microsoft, the world's largest software company.

“We still believe Microsoft will eventually own Yahoo,” UBS analyst Benjamin Schachter wrote in a research note late Monday. “Jerry moving out of the CEO role may accelerate this.”

Yahoo's woes have been compounded by the economic crisis gripping global financial markets and earlier this month the company announced it planned to lay off as many as 1,400 employees or 10 per cent of its work force.

Citigroup analyst Mark Mahaney said the markets are likely to react positively to Mr. Yang's departure, in a note delivered to clients Monday night.

Still, he cautioned that with a softening market for online display advertising in the U.S. – Yahoo's revenue engine – economic headwinds could continue to weigh down the company's stock price.

“Given the 50 per cent [year-to-date] correction in Yahoo shares, we believe the markets have been critical of both Yahoo's operational execution – its inability to sustainably [sic] reaccelerate its revenue growth – and its strategic execution – its inability to capitalize on its offer from Microsoft,” he said.

“So with this CEO change will come hope that Yahoo will improve its performance in either/both of these areas. Although we do not know who the next CEO will be or whether this will lead to a material change in the company's strategy, our Yahoo Hold fundamentals call remains unchanged.”

Yahoo said it will be looking to both internal and external candidates for the CEO post and has hired the executive search firm Heidrick & Struggles to assist in the search for Mr. Yang's replacement.

“Obviously a new chapter is about to turn for Yahoo,” Yahoo Canada general manager Kerry Munro said in an e-mail to The Globe and Mail.

“Jerry has and will continue to be Yahoo's biggest supporter and as the best performing business unit worldwide I can honestly say I benefited from Jerry's leadership over his tenure. I, like you, look forward to seeing what this new chapter holds for Yahoo and the Internet.”

Mr. Yang will continue to serve as CEO until the company can find a replacement. He will remain on the company's board of directors and will retain his title of “Chief Yahoo” in an effort to focus on “global strategy,” he said in a statement.

In an internal e-mail obtained by the website All Things Digital, Mr. Yang thanked employees for their support, saying that he will always “bleed purple” – the company's official colour.

“Despite the external environment we face, the fact remains that Yahoo is now a significantly different company that is stronger in many ways than it was just 18 months ago,” he said in the e-mail which was sent to employees on Monday.

“This only makes it all the more essential that we manage this opportunity to leverage the progress up to this point as effectively as possible. I strongly believe that having transformed our platform and better aligned costs and revenues, we have a unique window for the right CEO to take ownership over the next wave of mission-critical decisions facing the company.”

Talks between Microsoft and Yahoo broke down in May when Microsoft CEO Steve Ballmer pulled the company's final offer of $33 a share after Mr. Yang asked for $37. In the wake of the deal's collapse, activist billionaire investor Carl Icahn swooped in and purchased 5 per cent of the company.

Mr. Icahn immediately began a quest to remove Mr. Yang from the CEO chair and demanded a presence on the company's board of directors. Although Mr. Icahn and the Yahoo brass reached a truce that gave him three seats on the Yahoo's 11-member board, he has continued to insist that the company revisit talks with Microsoft.

Sue Decker, Yahoo's president, is expected to be among the candidates to succeed Mr. Yang, although she has been an integral part of the management team that has exasperated shareholders.

Dan Rosensweig, who resigned as Yahoo's chief operating officer, also could be lured back as CEO, or the board could turn to one of its own directors, such as former Viacom Inc. CEO Frank Biondi or former Nextel CEO John Chapple.

With a report from Associated Press