Ballmer portrayed Yahoo's options as particularly stark in a letter to Yang detailing his reasons for pulling back, and suggested any Google tie-up would preclude a Microsoft deal.
Microsoft and Google are increasingly competing on the same turf, such as Web-based applications, email and messaging. The proposed Yahoo purchase was meant to create a fiercer rival to Google and challenge its hold on Internet advertising.
"The real winner in all of this seems to be Google," said Canaccord Adams analyst Colin Gillis. "There's going to be no powerful number two" in the Web market, he said.
Gillis rated Yahoo a "buy" with a $35 price target before the deal talks with Microsoft collapsed. "We were very clear that was not based on fundamentals," he said.
Ballmer also warned Yahoo that it would give up its relationship with advertisers by coordinating with Google and could lose some of its best engineering talent.
Some analysts disputed that idea, saying Yahoo's operating results would certainly benefit from a Google partnership.
Other Google partners, including IAC/InterActiveCorp's Ask.com, have structured deals that keep them in control of their advertiser ties, Bernstein's Lindsay said.