WASHINGTON, US - Microsoft chief executive Steve Ballmer said Thursday he was "surprised" by the market reaction to the software giant's Web search deal with Yahoo!, whose share price was hammered on Wall Street.

"Walking through the deal and watching the market reaction, nobody gets it," Ballmer told a meeting of financial analysts at Microsoft's headquarters in Redmond, Washington. "I was kind of surprised by the market reaction."

"It is a win-win strategic partnership and it is a win-win deal from my perspective," he said. "Together we can create economic value that's going to benefit Yahoo! shareholders and Microsoft shareholders."

Yahoo! shares shed 12.08 percent on Wall Street to close at US$15.14 ($21.90) dollars on Wednesday while Microsoft gained 1.41 percent to finish at US$23.80.

Yahoo!'s slide continued in New York on Thursday and it was trading 4.62 percent lower at US$14.44 at 12:55 pm (1655 GMT). Microsoft was up 1.01 percent to US$24.04.

Ballmer said the deal, seen as a joint Microsoft-Yahoo! offensive against search market leader Google, allows Yahoo! to keep 88 percent of the search revenue they have today but with no research and development or capital costs.

He said some of what he called the "strange reaction" to the agreement may have been because "nothing got bought and nothing got sold."

"People expected something to get bought," he said. "But the partnership in and of itself creates economic value."

Under the no-cash deal announced Wednesday, Yahoo! will use Microsoft's new Bing search engine on its own sites while Yahoo! will provide the exclusive global sales force for the companies- premium search advertisers.

The deal came about 18 months after Yahoo! rejected a US$47.5 billion takeover offer from Microsoft.