Yahoo’s display advertising business is deteriorating, a search advertising deal with competitor Google Inc. (GOOG) has been bogged down by regulators, and another restructuring, complete with layoffs, is in the works but hasn’t been announced yet.

Yahoo shares rebounded with the market on Monday, but the company’s outlook remains far from encouraging. Little good news is expected when the company reports its third-quarter earnings on Oct. 21. A host of analysts have already started downgrading the company’s prospects.

Wall Street analysts on average expect Yahoo to report earnings of 9 cents per share on revenue of $1.37 billion.

“We don’t see any upside for Yahoo shares on a fundamental basis,” said Sandeep Aggarwal, analyst at Collins Stewart. “There may be further downside risk before it goes up.”

Aggarwal recently cut his Yahoo revenue and earnings estimates by 1% and 6%, respectively. He rates Yahoo a hold and set a $21 target for Yahoo shares.

On Monday, Yahoo shares surged almost 10% to $13.49. The company’s shares now trade at less than half the $33 price that software giant Microsoft Corp. (MSFT) was willing to pay for Yahoo in May.

Yahoo has suffered more than rival Google because it is heavily exposed to the slumping Internet display advertising market and it has not been as effective in making money from search ads.

But Yahoo remains a hugely popular Internet property and has about 20% of the U.S. search market, key reasons why Microsoft earlier this year attempted to acquire the struggling company.

While Microsoft has said it is no longer interested, many analysts believe that buying Yahoo remains the software maker’s best chance to transform itself into a credible Internet player. Given Yahoo’s weakened position, many observers think it’s only a matter of time before Microsoft steps forward once again.

Last week, a small Yahoo shareholder suggested a new plan by which Microsoft would buy Yahoo for $22 per share. Under the plan, Microsoft could then sell Yahoo’s Asian assets and non-search businesses, squeeze out $3 billion in cost savings and receive $2.8 billion of tax benefits, putting the price for Yahoo’s search business at $10.3 billion. Neither company was willing to comment on the proposal.

Though Yahoo’s shares have tanked, they still remain expensive by some measures. Yahoo has a forward price earnings ratio of almost 28 times, higher than many of its peers. Rival Google trades at a P/E of 14 times; Chinese Web portal Sohu.com Inc. (SOHU), 11 times; and Internet auctioneer eBay Inc. (EBAY) at almost 9 times.

Part of the reason for the high P/E is that Yahoo owns 33% of Yahoo Japan Corp. (4689.TO) and a 44% share of Chinese ecommerce group Alibaba Group Holding Ltd. While those are significant stakes, they are below the threshold needed to report consolidated earnings.

Analysts say Yahoo’s Asian holdings are also weighing on the company’s shares because they have fallen in value since Microsoft walked away earlier this year. They are particularly critical of this because some investors, including activist shareholder and new Yahoo board member Carl Icahn, had called on the company to sell those assets to bolster Yahoo shares after failing to reach a buyout agreement with Microsoft.

“Missing the window to monetize the Asian assets is very frustrating,” said CanaccordAdams analyst Colin Gillis. Gillis estimates Yahoo shares would be $4 higher if the company had sold the assets in the summer.

To be sure, Yahoo shares could be buoyed if Microsoft reconsiders bidding for the company. While Microsoft has said it will not revisit the issue, speculation continues to swirl that Yahoo is now so cheap that the software giant will be tempted to restart talks.

And Yahoo is certainly cheap when compared to its competitors by some metrics, like enterprise value to Ebitda, a proxy for cash flow. By that measure, Yahoo trades at 4.2 times, making it half as expensive as Google, which trades at about 9.2 times.

Still, analysts aren’t enthusiastic.

Rob Sanderson, an analyst at American Technology Research, says he expects the company will fall short of third-quarter expectations and lower its guidance for 2009.

“Despite being washed out under 5x our lowered EBITDA estimates, the stock could trade lower in the near-term,” Sanderson wrote in a recent note.

And there is little to indicate Yahoo’s business prospects will improve anytime soon. Deteriorating macroeconomic conditions are squeezing the companies that place ads through Yahoo, forcing them to cut back their spending. That will hurt Yahoo’s main business, Internet display advertising, which is the source of 62% of Yahoo’s U.S. revenues, according to research group eMarketer.

Yahoo continues to lose ground to Mountain View, Calif.-based Google in search advertising. Yahoo had hoped to compensate by striking a search ad agreement that would allow Google to broker some ads that appear alongside Yahoo search results in the U.S. and Canada. Yahoo has said the pact could boost revenue by as much as $800 million a year.

But advertisers and U.S. regulators have voiced concerns about the deal, worrying that it will concentrate too much power with the two companies. On Oct. 3, the pact was placed on hold while the Department of Justice continues its review.

Yahoo stock has also been hit by speculation that it might try to strike a deal for Time Warner Inc.’s (TWX) struggling AOL unit, a move that would in theory create an online advertising behemoth. But investors are concerned that Yahoo may overpay for a company that is even more troubled than itself and then struggle with huge cultural and technological integration challenges.

And Yahoo has remained silent on a restructuring that will almost certainly entail large layoffs. While the market has clamored for the company to cut costs, it hasn’t said anything about its plans.