Yahoo has announced that Jerry Yang will step down as chief executive as soon as the board finds a replacement.
The news sent company shares up 4 per cent on hopes the departure would clear the way for a deal with Microsoft.
Mr Yang - who will return to focusing on strategy and technology - tried to carve an independent strategy for Yahoo but was blamed when Microsoft walked away from an offer to buy Yahoo earlier this year.
Rival Google abandoned a search advertising partnership amid regulatory concerns, and Mr Yang faced a growing criticism from investors and analysts as Yahoo's shares nosedived.
Yahoo's months-long discussions with Time Warner about combining with its AOL unit - as yet another way to boost Yahoo's earnings - have also failed to produce a deal.
"The company is in desperate need of change and this is clearly one way to do it," said Ross Sandler, an analyst at RBC Capital Markets, adding that Microsoft could enter the picture again. "Jerry was the roadblock for the last deal getting done," he said.
Mr Yang has consistently said that he would sell the company for the right price.
Yahoo shares rose to $11.10 in after-hours trading from their Nasdaq close of $10.63.
Mr Yang, a co-founder of Yahoo, took on the CEO role in June 2007, hoping to strengthen its position as an online consumer brand.
"From founding this company to guiding its growth into a trusted global brand that is indispensable to millions of people, I have always sought to do what is best for our franchise," he said in a statement.
In an e-mail sent to employees, a copy of which was obtained by Reuters, Mr Yang said his decision to step down was taken jointly with Yahoo's board.
Reuters