Time Warner CEO Dick Parsons has said that he wants any deal involving AOL to be able to boost the site's traffic. Time Warner shareholder Carl Icahn has warned Parsons to not value AOL at a discount in any deal.

NEW YORK (CNNMoney.com) - AOL and Google are in talks about expanding their online ad partnership, and the Internet search giant is also reportedly discussing taking a 5 percent stake in AOL.

The talks to buy the stake in AOL for $1 billion were reported in The Wall Street Journal's online edition Friday.

In addition, Google (Research) and AOL are in discussions about expanding their existing online advertising partnership, a person close to the companies said.

AOL had been in talks with Microsoft's MSN unit about switching from using Google's search technology to MSN's revamped search engine but it appears those talks have fallen apart.

AOL accounted for 10 percent of Google's revenues in the third quarter of this year, according to Google's latest quarterly filing with the Securities and Exchange Commission.

If Google were to hold on to AOL's business, that would be a significant blow to MSN, which is trying to gain ground in the online search game. It trails Google and Yahoo! in search market share and many analysts believe it will be difficult for MSN to catch either of these two.

AOL, an Internet access and Web portal owned by media conglomerate Time Warner, (Research) had been in discussions with Google and cable company Comcast (Research) earlier this fall about a joint venture.

Yahoo! (Research) was also said to have been considering an investment in AOL as well but apparently is no longer engaging in discussions with AOL.

AOL has suddenly become an attractive commodity to other online media firms because of the company's strategy to shift from a business model that relied on Internet access fees to one that depends more on online advertising.

Spokesmen for Google, Time Warner and Microsoft (Research) were not immediately available for comment. Time Warner is also the parent company of CNNMoney.com.

The AOL talks come as Time Warner faces significant pressure from shareholder Carl Icahn, who has advocated for a break-up of the company.

Icahn has also warned Time Warner not to give away AOL for too cheap a price, saying in a speech late last month that he would "hold the board of Time Warner personally responsible if they give away AOL for the wrong reasons."

But if Google does take a stake in AOL at the proposed valuation, that would imply that AOL is worth $20 billion, or approximately 25 percent of Time Warner's current market value.

Time Warner Chairman and CEO Dick Parsons, speaking at the Credit Suisse First Boston Media Week conference in Boston last week, said that AOL was speaking with other companies about a possible deal that would help increase traffic at AOL's site as well as give it more robust search technology.

But he also said that Time Warner was not looking to sell AOL outright.

AOL has made much of its content free to all Web users over the past year in a bid to attract more visitors. The strategy appears to be working. In the third quarter, advertising revenue in the AOL unit jumped 28 percent from a year ago, which helped to lift operating profits at AOL by 16 percent.

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