Yahoo has settled its bitter two-month feud with billionaire investor Carl Icahn.

The company announced on Monday that the two sides had reached an agreement in which Icahn will call off his attempt to oust the company's board of directors.

In exchange, Icahn will be granted a seat for himself and two additional positions on the Yahoo board.

The two additional board members will be selected from a list of nine nominees put forward by Icahn, bringing the total number of board members to 11.

Eight of Yahoo's current board members will remain up for re-election, although Icahn will pledge all of his shares (roughly five per cent of Yahoo stock) in support of the board.

Board member Robert Kotick will not seek re-election and will step down. Chairman Roy Bostock said that the agreement will serve the best interests of all Yahoo's shareholders.

"We look forward to working productively with Carl and the new members of the board on continuing to improve the company's performance and enhancing stockholder value," said Bostock.

"Yahoo is a world-class company with an extremely bright future, and collaborating together, I believe we can help the company achieve its ambitious goals."

The settlement ends a feud between Icahn and Yahoo that began in May, when the company officially ended talks with Microsoft over a possible acquisition for part or all of the company.

Icahn had previously claimed that he could quickly reach a sales deal with Microsoft that would yield more money to shareholders than Yahoo could hope to raise on its own.

The investor had even earned the public praise of Microsoft, which said that it would be willing to come back to the table should Icahn's takeover succeed.

While he said that he would be willing to work with the board on a new strategy, Icahn did not rule out the possibility of new talks over a sale to Microsoft.

"I continue to believe that the sale of the whole company or the sale of its search business is the right transaction and must be given full consideration," said Icahn.

"But I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders."

The settlement will not take effect until Yahoo concludes its annual shareholder meeting on 1 August.