Today, one day after I wrote about Google and Yahoo having modified the terms of their search advertising partnership, Google officially announced on its blog that it would end the agreement with Yahoo.

Google justifies its decision with the ongoing criticism from government regulators and some of its advertisers. The search engine company wanted to avoid a long legal battle and further investigations that would only have led to more delays and uncertainty.

While the decision to end the agreement marks a setback in Google’s rapid growth, it could be a chance for Yahoo. The reason being that the modified agreement, which Google had just handed to the antitrust regulators, limited Yahoo’s earnings potential to 25% of the total search revenue. Now, Yahoo can continue to monetize its search traffic on its own and, more importantly, it can look around for other partners.

Microsoft seems to be the most logical choice, given that the software corporation has been interested in Yahoo for a while and that Carl Icahn, member of the board at Yahoo, is still trying to sell the company to Microsoft or at the very least to get it into a partnership with MSFT.

Yahoo is an attractive acquisition target because it is the number two search engine behind Google. The additional traffic from Yahoo’s search business and from its portal sites would immediately push the buyer into a top position in the coveted search engine market.

Yahoo’s share price is up more than 7% today, but it’s still cheap compared to the company’s market cap in 2007. Google is down almost 4% as of this writing. Microsoft is down 2%.