Microsoft (NSDQ: MSFT) and Yahoo (NSDQ: YHOO) continue to play the cat-and-mouse game out in the open, even on the weekend: MSFT has send a letter to Yahoo board, and has set a three-week deadline for Yahoo to accept its current $31 a share offer or Microsoft will take its case to Yahoo shareholders. This could also mean a lower offer from Microsoft in case of a proxy war.

This comes after meetings late this week between the two didn’t yield anything, and then a press war ensued.

The latest letter, signed by Steve Ballmer, and send to the Yahoo board, has the following points (most of which aren’t new):

-- We’ve seen no indication that you have authorized Yahoo management to negotiate with Microsoft...this is despite the fact that our proposal is the only alternative put forward that offers your shareholders full and fair value for their shares.

-- By any fair measure, the large premium we offered in January is even more significant today.

-- If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo board.

-- This action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

The full letter is here. More to come…