SAN FRANCISCO (Reuters) - Microsoft Corp (MSFT.O) and billionaire investor Carl Icahn's joint proposal for Yahoo Inc (YHOO.O), which was rejected on Saturday, included $2.3 billion in guaranteed annual revenue from search advertising for five years, people familiar with the matter said on Sunday.

In joining forces with Icahn, Microsoft sweetened the terms of a proposal to buy 's search business after withdrawing its offer in May to buy the whole company.

The improved terms included $2.3 billion in guaranteed annual revenue from search advertising for five years, with the option to extend the deal for another five, according to the sources, who asked not to be named.

On Saturday Yahoo rejected the proposal, which would have given Microsoft its search business and left Icahn, who owns nearly 5 percent of Yahoo, in charge of the remaining company.

After withdrawing its $47.5 billion full buyout offer, Microsoft said in June it had offered Yahoo $9 billion in cash for a partial deal, as well as revenue guarantees on search advertising that would have brought Yahoo $1 billion a year in operating income.

But Microsoft wanted an exclusive, 10-year search ad partnership with Yahoo and was willing to guarantee revenue for only three of those 10 years, a source told Reuters at that time.

Yahoo instead chose to sign a non-exclusive search deal with Google Inc (GOOG.O), which promises $800 million a year in revenue for Yahoo and leaves it free to seek similar search advertising partnerships with other companies.

In its latest proposal, Microsoft had joined forces with Icahn to increase to five the number of years it would guarantee revenue. It remains unclear whether Microsoft had previously put a revenue guarantee amount on the table.

Microsoft and Yahoo officials declined comment. Icahn did not return a call seeking comment.

(Reporting by Anupreeta Das and Daisuke Wakabayashi, editing by Martin Golan, Toni Reinhold)