In a statement, the software giant said it failed to win over Yahoo’s board of directors – even after boosting its bid by $5 billion. To move forward from here would require a shift into hostile mode, Microsoft said, a time-consuming and uncertainty filled process that would make Yahoo “undesirable as an acquisition candidate.”

“After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal,” Microsoft Chief Executive Officer Steven A. Ballmer said in a statement.

It’s only been three months after heavyweight Microsoft launched its half-stock, half-cash buyout offer for Yahoo, offering a 62% premium over Yahoo’s market price. Microsoft had offered to boost its bid for Yahoo from $31 a share to $33 a share – adding that afore-mentioned extra $5 billion.

Unfortunately for Microsoft, even that higher price was nowhere near the $37-a-share offer that Yahoo co-founder and CEO Jerry Yang said it would take to get the deal done.

The details of the negotiations were contained in a letter that Ballmer sent to Yang; Microsoft released the letter to the media over the weekend. According to the letter, that extra $4 per share would have increased the cost of the deal by another $5 billion – bringing the total to nearly $55 billion.

Yahoo rejected Microsoft’s first $44.6 billion takeover offer Feb. 11, saying the bid substantially undervalued the company’s worth. The $31-per-share offer valued Yahoo at a 62% premium on Feb. 1, but Yahoo has traded as high as $31 a share as recently as November. Yang feels Yahoo is worth more than Microsoft is offering, even though the $33 per share offer is only about a dollar off of Yahoo’s 52-week high of $34.08.

Yahoo has consistently been losing market share to Google Inc.’s (GOOG) market dominance and tried to engage a number of other competitors such as Time Warner Inc. (TWX) and News Corp. (NWS) about possible partnerships, but with little success.

“This process has underscored our unique and valuable strategic position,” Yang said in the statement, MarketWatch reported. “With the distraction of Microsoft’s unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users.”

As late as Friday, Yahoo shares jumped 7% with a gain of $1.86 to close at $28.67 on reports of “intensifying” talks with Microsoft and an expected deal. But with the announcement on Saturday, some analysts feel the formal rescinding of the offer and the fact that Microsoft seems unwilling to resort to a proxy contest could put downward pressure on Yahoo shares, sending the stock back down towards its 52-week low of $18.58. If that happens, Yang and Yahoo’s board of directors could find themselves with a slew of lawsuits filed by angry Yahoo shareholders.