AOL is believed to have held discussions with Yahoo!'s advisers in recent days to see if an agreement between the two companies is possible.
Yahoo! and AOL have held discussions in the past, but failed to team up because of differences over price.
Microsoft's unwelcome $44.6bn (£23bn) bid for Yahoo! and the credit crunch has given the talks fresh momentum.
The terms of the current discussion between Yahoo! and AOL are unclear, but a potential stumbling block is the role of Google, which owns a small stake in AOL and has advertising agreements with the company.
Strict anti-trust laws could come into play, if Yahoo! combines with AOL or Rupert Murdoch' News Corporation, which is also said to be involved in tentative talks with Yahoo!.
Murdoch is understood to have met Yahoo! chief executive Jerry Yang last week about merging its online division, which includes MySpace, with Yahoo! to create a powerful presence on the internet.
Under the News Corp plan, Murdoch's empire is understood to have offered to buy a 20% stake in Yahoo! in an agreement that would included Yahoo! swap shares in the company for a clutch of News Corp's online assets.
Yahoo! has dismissed Microsoft's approach as undervaluing its brand, audience, investments in advertising platforms and future growth prospects, free cash flow and earnings potential.
Microsoft itself is also under pressure from its own investors about any possible deal and an influential Microsoft investor has called on the software giant to walk away from its $31-a-share offer for Yahoo!
Robert Olstein, a fund manager with about 1m Microsoft shares, has written to the firm saying that it should "in no circumstances" raise its offer.
He, like a growing band of other Microsoft investors, believes that buying Yahoo! would prove a distraction to Microsoft.
Microsoft shares have fallen by about 10% since it made the Yahoo! offer, wiping almost $35bn from its share value.
Return to internet news headlines
View Internet News Archive