The move comes after Google appeared to be on the verge of walking away from the partnership, which was announced in June to foil Microsoft's takeover attempt of Yahoo. The deal has since drawn scrutiny from U.S. regulators amid a growing chorus of criticism from advertisers.
The two Internet companies have submitted a reworked proposal to the U.S. Department of Justice that shortens their partnership to just two years from 10 years, the source said.
The revised deal also caps the percentage of search revenue that Yahoo can collect from Google at no more than 25 percent, and lets Google advertisers opt out of being placed on Yahoo, the source said.
Yahoo spokeswoman Tracy Schmaler said in an emailed statement the company continues to work with the Justice Department and discussions are ongoing.
Google spokesman Adam Kovacevich declined to discuss the details of the process.
Analysts said the new terms could help the deal get past regulators, but questioned whether such a limited partnership would be financially lucrative to Yahoo, which is a distant No. 2 to Google in the web search market.
Mukul Krishna, digital media global director at consulting firm Frost and Sullivan, described the revised terms as "more of a Band-Aid than the extensive surgery that is needed" for Yahoo.
"This sweetens the deal to go through antitrust red flags and gives (Yahoo CEO) Jerry (Yang) some breathing space, but how much money it would add to Yahoo's top line would be very crucial," Krishna said. "And it doesn't answer the question, what after two years?"
Mark May, an analyst with Needham & Co, said Yahoo's willingness to limit the scope of the deal "tells us that other alternatives are either not available or not attractive at all."