Update, Friday evening: The New York Times, Wall Street Journal and Bloomberg News are reporting that the companies aren't considering a merger or acquisition, but they're exploring some sort of strategic partnership.

Original post follows:

Microsoft and Yahoo are again discussing the possibility of a merger or some other combination, according to the Wall Street Journal and the New York Post, which was first to report the news. Both publications are citing anonymous sources. The WSJ cautions that the talks are in the early stages and notes that similar discussions previously didn't result in a deal.

Yahoo shares rose in early trading Friday, while Microsoft shares dropped.

As Mary Jo Foley notes, Yahoo CEO Terry Semel happens to be speaking at a Microsoft online advertising conference in Redmond next week. Semel has actually spoken at the same event in the past, but maybe this time he'll have something more interesting to discuss than general industry trends.

Would these two make a good combination? When I spoke to search expert Danny Sullivan in March, he said a Yahoo deal would do more for Microsoft than anything else the company has done in its efforts to catch up to Google in that market. But an acquisition like this would be a monster deal for Microsoft. Even before getting to the potential integration challenges, Yahoo wouldn't come cheap. Its market capitalization is more than $44 billion as of Friday morning.

Update, 9:50 a.m.: A Microsoft representative says the company has no comment. But the reports have clearly gotten the attention of Wall Street investors and analysts. In a note to clients, Sarah Friar of Goldman Sachs assessed the positive and negative aspects of a possible deal. She wrote:

Positively, in our view, an acquisition of Yahoo! would provide Microsoft with technology assets, advertising relationships, and "eyeballs" to prove its seriousness in this market. Negatively, large deals carry significant risk, not least being Microsoft's ability to retain Yahoo! talent. Thus we'd prefer more of a stock-based deal with strong lock-in for current yahoo! employees. We also believe a champion would also have to rise within Microsoft--perhaps Ray Ozzie--to ensure the success of the acquisition.

Update, 10:15 a.m.: Even as Wall Street goes into a frenzy, some analysts are highly skeptical about all of this. "My opinion on the matter is that it's extremely unlikely," said Matt Rosoff, an analyst at the Kirkland-based Directions on Microsoft research firm, when I spoke with him a few minutes ago. While some sort of partnership might be possible, perhaps related to advertising or search, Rosoff listed several reasons why an acquisition wouldn't make sense:

• The huge price tag. Yahoo would be larger than anything Microsoft has acquired before.
• The large amount of overlap between the two companies, and the big investments Microsoft has made in building out its search technology and advertising infrastructure in recent years.
• The differences in the Yahoo and Microsoft cultures, and the likely problems integrating Yahoo employees into the Microsoft business.
• The message that an acquisition would send. In some ways, buying Yahoo would amount to an admission of failure by Microsoft, and the company doesn't seem anywhere close to that point.