Microsoft made its first unsolicited offer for Yahoo a year ago
Yahoo said the offer "substantially undervalues" the company and is not in shareholders' interests.
Microsoft's offer was worth $31 a share, 62% above the level at which Yahoo shares were trading when the offer was made on 1 February.
A merged Microsoft and Yahoo would be one of the world's biggest technology firms, and would challenge Google.
As it rejected the Microsoft offer, Yahoo said that the deal undervalued its brand, audience, investments in advertising platforms and future growth prospects, free cash flow and earnings potential.
The company said that its board of directors was continually evaluating all of its strategic options.
A source quoted by the Wall Street Journal said that Yahoo's board would be unlikely to consider anything below $40 per share.
A $40 a share offer would be a 109% premium to the $19.18 closing price of Yahoo's shares the day before the original offer was announced.
Yahoo's shares have not traded above $40 for two years.
Although its shares have fallen sharply since then, Yahoo's websites remain among the world's most popular.
Microsoft's original offer was worth as much as $44.6bn, but since the deal was announced Microsoft shares have fallen sharply.
As half of Microsoft's offer is in cash and half in stock, that has reduced the value of the bid to about $41.8b.