Without providing many specifics, Yahoo said Microsoft renewed an earlier bid to buy the company's search engine and proposed turning over the remaining pieces to a board controlled by Icahn.
Yahoo said it received the complex proposal Friday and was given less than 24 hours to respond.
Backed into a corner, Yahoo lashed out in a blunt manner likely to inject even more bad blood into its already venomous relationship with Microsoft and Icahn.
"It is ludicrous to think that our board could accept such a proposal," Yahoo Chairman Roy Bostock said in the statement.
"While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders."
In another indication of the animosity between the two companies, Bostock said Microsoft has taken the "completely absurd and irresponsible" stance of refusing to hold any further talks with Yahoo's current board and management.
Microsoft did not immediately respond to a request for comment late Saturday. Efforts to reach Icahn were unsuccessful.
Yahoo said it unsuccessfully reiterated its willingness to sell the entire company to Microsoft for $47.5 billion, or $33 per share -- a bid that the software maker dangled in early May before withdrawing it in a pique over Yahoo Chief Executive Jerry Yang's demand for $37 per share.
Sunnyvale-based Yahoo hasn't explained why it finds a sale at $33 per share to be more palatable now than it was a little over two months ago. Microsoft, though, has said it's no longer interested in buying Yahoo in its entirety unless Icahn's board is on the other end of the negotiations.
The breakdown of those takeover negotiations infuriated many Yahoo shareholders who fear the company's stock price would plunge back below $20 -- a threshold reached just before Microsoft made its initial bid in early January. Yahoo shares finished Friday at $23.57.
Yahoo's squandered opportunity to sell to Microsoft in May prompted Icahn to lead a rebellion aimed at removing Yahoo's entire board so he could fire Yang and try to revive sales talks with Microsoft.
Icahn's attempted coup gathered more steam earlier this week when Microsoft publicly announced it might be willing to buy all or part of Yahoo if shareholders voted to remove the current board. Yahoo shares climbed 10 percent during the past week on hopes that Microsoft's backing of Icahn might pave the way for a deal.
Since it dropped its bid to buy all of Yahoo, Microsoft has focused its overtures on Yahoo's search engine -- the second most used on the Internet behind Google Inc.'s.
Microsoft in May offered to buy Yahoo's search operations for $1 billion and to spend another $8 billion to acquire a 16 percent stake in Yahoo's remaining operations.
Yahoo said the proposal that Microsoft submitted Friday "contains a number of improvements," but insisted it still wasn't good enough.
Yahoo offered no concrete details about what Icahn had proposed to do with the rest of the business, but indicated part of the plan included spinning off the company's Asian operations. The company pooh-poohed the notion of entrusting its business to Icahn, noting his inexperience in the Internet industry.
Icahn, who has been challenging corporate boards for more than two decades, owns a roughly 5 percent stake in Yahoo and hopes to make a profit by pushing the company's stock price above $30.
Instead of selling its search engine to Microsoft, Yahoo opted to forge an advertising partnership with rival Google Inc. That represented a bit of irony because Google's dominance of the Internet search advertising market is the primary reason that Microsoft is pursuing Yahoo.
As Google has become more successful, both Yahoo and Microsoft have been regressing, a dynamic that many analysts believe make it imperative for the two companies to put aside their differences and combine forces.
Yahoo has estimated that it can boost its annual revenue by about $800 million by relying on Google's superior technology to show some ads alongside the search results on its Web site.
But Yahoo's alliance with Google is being closely vetted by antitrust regulators because the two companies together control more than 80 percent of the U.S. search advertising market. To accommodate the review, Yahoo and Google have voluntarily agreed to wait until late September to begin working together.
Microsoft has maintained its proposal would be better for
Yahoo's stockholders than the Google partnership.