SAN FRANCISCO - SETTING the stage for a possible bidding battle, Microsoft is considering an investment in social networking site Facebook that would value the rapidly growing online hangout at US$10 billion (S$14.9 billion) or more, according to a report published on Monday.

Citing unnamed people familiar with the matter, The Wall Street Journal said Microsoft is holding preliminary discussions that could culminate in a US$300 million to US$500 million investment in Facebook, which was founded just 3 1/2 years ago.

In exchange, Microsoft would receive up to a 5 per cent stake in privately held Facebook, which has previously raised nearly US$41 million from venture capitalists and other individual investors.

Facebook declined to comment on the reported discussions as did Microsoft, which branded the report as 'rumor and speculation'. An outright sale of Facebook is considered unlikely.

Mark Zuckerberg, Facebook's 23-year-old co-founder and chief executive, has repeatedly expressed his desire to remain independent. He rejected a US$1 billion acquisition offer from Yahoo last year.

Facebook also has been exploring whether to raise more money from venture capitalists to help expand its current payroll of roughly 300 employees and finance other parts of its ambitious expansion plans.

With more than US$100 million in annual revenue, Facebook is believed to be a prime candidate for an initial public offering of stock next year or in 2009.

If Facebook's talks with Microsoft heat up, it could draw online search leader Google to the negotiating table, too.

Microsoft already is delivering online ads to Facebook in the United States as part of an agreement that expires in 2011. Citing unnamed sources, the Journal also reported Microsoft and Facebook are considering extending the current contract and expanding the advertising to other parts of the world. -- AP