Apple Inc is talking with Microsoft Corp about making it the default search engine provider for the iPhone, replacing Google Inc, BusinessWeek reported on Wednesday.

If Apple displaces Google from its preferred status on the smartphone, it would be perhaps the clearest sign of the growing tension between two Silicon Valley icons, which were considered allies in a common cause against Microsoft. Talks between Microsoft and Apple have been going on for weeks, the article said, citing two people familiar with the matter. Negotiations might not conclude quickly and might still fall apart, the article said. Microsoft and Google declined to comment. Apple was not immediately available for comment.

Microsoft’s Bing search engine, which debuted last year, is trying to wrest market share from Google, the leader in Internet search. Apple’s rivalry with Microsoft dates back years, though they work together in certain areas of the software market. In contrast, the Apple-Google rift is only emerging. The companies compete on a number of fronts, including operating systems and the fast-growing smartphone market. “Obviously with Google and Apple, they seem to be having some friction,” said ThinkEquity analyst Vijay Rakesh. Until recently, replacing Google with Bing would have been seen as unreasonable, but now such a move might be possible, said Oppenheimer & Co analyst Yair Reiner. “While Microsoft and Google pose similar threats to Apple, Google’s budding success with Android and Chrome may represent more immediate dangers to Apple, which could push it into the arms of Microsoft,” Reiner wrote in a research note. Google and Apple have lived in friendly coexistence for years as each became leaders in their arenas. Google is the default search engine on Apple’s desktop and laptop computers. Their ties run deep. Google director Ann Mather was chief financial officer at animation company Pixar, while Apple founder Steve Jobs was CEO. Former U.S. Vice President Al Gore is an Apple board member and also a senior adviser to Google. But Google Chief Executive Eric Schmidt resigned from Apple’s board in August, even as Google increased its presence in Apple’s markets. Google has been gaining strong support from handset makers and operators with its Android mobile operating system. Earlier this month, the search giant unveiled its Nexus One smartphone, which will compete with Apple’s iPhone.

Google recently agreed to buy mobile advertising company AdMob for $750 million, a company that Apple reportedly pursued. Apple bought AdMob competitor Quattro Wireless. Apple is working on ways to manage ads displayed on its mobile devices, a move that would challenge Google’s advertising business, the BusinessWeek article said. “Apple sees Android as a competitive platform driving competitive devices and it recognizes that Microsoft is desperate to gain search market share,” said Clayton Moran, an analyst at Benchmark. “Microsoft, I’m sure, will give Apple favorable economics so strategically and financially it could make good sense for Apple,” said Moran. The terms of Google’s deal with Apple are unknown, though browser toolbar deals in the PC world typically involve the search provider paying an upfront fee to the PC maker, said RBC Capital Markets analyst Ross Sandler. The search provider makes the money back when PC users click on search ads. IPhone searches using Google’s search bar appear to return more standard, unpaid results than paid search ads, suggesting that Google might lose money on the deal, Sandler said. For Microsoft to displace Google on the iPhone, “they’re going to have to be willing to lose more money than Google is losing,” Sandler said. Microsoft has invested hundreds of millions of dollars in its money-losing online business as it tries to gain an edge in Internet-based advertising markets. “They’re both playing the same game,” Sandler said of Microsoft’s and Google’s mobile plans. “They both need to be there longer term, it’s just a question of how much do you have to give up today in order to chip away at that longer term vision.”

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Microsoft Corp’s Bing search engine won more market share from rivals last week, according to new industry data released on Wednesday, but still trails Google Inc and Yahoo Inc.

Challenging market leader Google — which in turn is looking to break into Microsoft’s core software market — is a long-term project, said Microsoft chief executive Steve Ballmer.

“We have had some very good initial response,” Ballmer said at a conference in Detroit. “I don’t want to over-set expectations. We are going to have to be tenacious and keep up the pace of innovation over a long period of time.”

Microsoft grabbed 12.1 percent of U.S. Internet searches for the work week June 8-12, according to data released by industry tracker comScore earlier on Wednesday.

That is up from 11.3 percent in the June 1-5 period — the week in which Bing was launched — and up from 9.1 percent the week before that.

For comparison, Google got 65 percent of U.S. searches in May, the last full month for which figures are available, followed by Yahoo with 20.1 percent and Microsoft with 8 percent.

Analysts and investors are keenly awaiting data for all of June to see if Microsoft can hold onto early gains.

Ballmer acknowledged the tough task of beating Google, which he referred to as “a big dog competitor.”

The world’s largest software company has long been determined to play a major role in the lucrative Web search market after watching upstart Google take a stranglehold.

At the same time, Google is looking to take advantage of its popularity to launch software that competes with Microsoft’s, which has created a new source of tension between the two companies.

Microsoft ratcheted up that tension on Wednesday by claiming that Google’s new Apps Sync for Microsoft Outlook software — which allows users to share data between their Outlook e-mail and Google’s online offerings — disables a key function in Outlook.

“The installation of the Google Apps Sync plugin disables Outlook’s ability to search any and all of your Outlook data,” Outlook product manager Dev Balasubramanian wrote on a Microsoft blog. “It is also important to note that uninstalling the plugin may not fix the issue.”

The problem, though relatively unimportant to users, represents a crucial struggle between Microsoft and Google for e-mail customers.

Google’s new product allows business users to continue using Outlook for email and other tasks, but the back-end functionality and data storage moves to Google, instead of residing on a company’s internal servers running Microsoft software.

Google acknowledged the Outlook problem identified by Microsoft, and several other issues where its software does not mesh well with others.

“We’re working with Microsoft and other partners to help fix these issues and support additional Outlook features like multiple calendars,” said Google Apps senior product manager Chris Vander Mey in a blog post. “We’ll keep you posted on our progress.”

Microsoft shares closed up just less than 1 percent at $23.68, while Google’s fell 0.2 percent to $415.16, both on Nasdaq.

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