When sources at Microsoft last week told BoomTown that it was going to use Carl Icahn as a kind of messenger for a new ad search proposal, I thought: Uh-oh.

And tonight, like clockwork, Yahoo (YHOO) rejected Microsoft’s (MSFT) latest bid to buy its search and advertising search business, which was delivered in conjunction with the billionaire activist investor, who is waging a proxy fight against the company.

Why? Well, it’s kind of like sending Pepé Le Pew to a garden party.

Sources tell me the bid included a $20 billion ad search revenue guarantee over 10 years, as well as other small improvements on Microsoft’s previous proposal.

Still, Yahoo turned up its nose at it.

“This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!’s stockholders in mind,” said Yahoo Chairman Roy Bostock in a statement.

He added later: “After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a ‘take it or leave it’ proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!’s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond.”

Actually, this new bid–made Friday with that 24-hour expiration date, which makes Microsoft and Icahn sound like the evil villains in James Bond movies–was similar to its last one, but definitely sweeter.

But, as it was described in the Yahoo statement, the bid also added Icahn into the mix by giving him control over the rest of Yahoo–which includes its powerful suite of communications and content assets–via a new board.

Presumably, Icahn would then turn around and merge into either News Corp.’s (NWS) MySpace or Time Warner’s (TWX) AOL. (News Corp is the owner of Dow Jones and of this Web site.)

Thus, Yahoo agreed to disagree, noting it was willing to sell the company for the $33 once offered by Microsoft in its now-dead takeover bid (which, of course, they must say).

“It is ludicrous to think that our Board could accept such a proposal,” Bostock said in the statement. “While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders.”

This strong sentiment should not come as a surprise for anyone who has talked to Yahoo CEO Jerry Yang lately.

In a conversation I had with him, I came away with one single impression about how he felt about Icahn.

And that would be complete and utter disdain. Plus one.

“I think handing over the company to Carl Icahn for the express purpose of hoping he can negotiate a complex deal with Microsoft is a big mistake for shareholders,” Yang said to me.

The Yahoo statement tonight went further.

“The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo!’s remaining nonsearch businesses, which would be overseen by Mr. Icahn’s slate of directors, which has virtually no working knowledge of Yahoo!’s businesses,” it said.

Translation: Icahn is a Luddite.

And, even more, Yang is perhaps even more offended that Microsoft has hooked up with Icahn in its efforts to oust him and Yahoo’s board, considering the move to be a very dirty trick.

“[Microsoft's] motivations are suspect and there is simply no good reason to think they will actually show up at the end of the day,” said Yang in our conversation.

Another source close to Yahoo was even more clear: “This is a company with some dignity,” the source said. “And we would rather go down fighting than turn the keys over to people who will ruin it.”

For its part, Microsoft is just as completely exasperated with Yang and Yahoo’s board and feels it can move against it without its cooperation.

“It’s just impossible to deal with the Yahoo board or Yang,” said one source at Microsoft. “They have no intention of negotiating, so we’re just going to do what we have to do.”

While some might call it all corporate theater, these are very real feelings on all sides.

The August 1 board meeting is suddenly looking very, very ugly, as Yahoo, Microsoft and Icahn become more entrenched than ever.

And with only 20 days to go until it takes place near Yahoo’s HQ in Sunnyvale, Ca. and bad feelings all around, there’s not a lot time to work things out to everyone’s satisfaction, even though they all should.

Thus, it might actually fall to shareholders, who are irked at Yang and the Yahoo board, but who also don’t really trust Icahn and would have to hold their noses to vote for him.

Here’s an easier way to understand this situation now: It stinks.