Wednesday, November 5, 2008 – Under threat of a suit by the Justice Department Google this morning terminated its controversial, widely feared revenue-sharing advertising agreement with Yahoo.

Google lawyer David Drummond made this announcement on Google web site:

“After four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement.

“We’re of course disappointed that this deal won’t be moving ahead. But we’re not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on. Google’s continued success depends on staying focused on what we do best: creating useful products for our users and partners.”

Apparently the concessions Yahoo reportedly made over the weekend to curry the DOJ’s acceptance didn’t work.

Yahoo reportedly offered to cap the amount of revenue that it could have generated from Google search ads to 25% of its search revenues, shorten the length of the agreement from 10 years to two years, and let Google advertisers decline to have their ads appear on Yahoo sites.

Yahoo in turn put out a statement saying it wishes Google had stared down the government.

It said it “continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.”

The Google deal was the rabbit hole Yahoo ducked down trying to avoid Microsoft. It was supposed to bring Yahoo $800 million a year. Now that the hole’s caved in Yahoo is going to have to come up with a viable long-term business plan, which activist Yahoo board member Carl Icahn still thinks lies in the arms of Microsoft – at least for the search end of Yahoo.

Microsoft of course lobbied fiercely against the tie-up.