Yahoo's shares fell to a five-year low of $13.20 before recovering some ground to be down 4.5 percent to $13.92 in late morning trade on Nasdaq.

Analysts at American Technology said Yahoo's premium display business faced significant headwinds on a slow-down at key groups of advertisers such as financial companies and automakers, and caution among online advertising customers.

Bank of America analysts also expressed concern about weakening display advertising and lowered their target price for Yahoo shares to $16 from $24, saying they now expect third quarter display advertising to be worse than expected.

"Our channel checks indicate the market for display ad, particularly branded or (cost per thousand)-based ads, continues to worsen beyond our prior expectations and from second quarter levels," they said.

Both sets of analysts said a regulatory delay of a Yahoo deal to outsource its search marketing to Google Inc (GOOG.O). was a slight negative.

American Technology lowered its 'buy' target for Yahoo to $22 from $33 saying there is still hope for Microsoft (MSFT.O) to come back with an offer to buy Yahoo, after its failed bid earlier this year.

"As Yahoo shares decline and Microsoft struggles in its online services business, it is increasingly likely Microsoft will make a new offer," said Rob Sanderson, analyst at American Technology Research.

Shares in Google were up 33 cents to $346.34, while shares in Microsoft were down 1 percent, or 23 cents, to $23.

(Reporting by Yinka Adegoke; Editing by Tim Dobbyn)