Daniel Loeb, chief executive of hedge fund Third Point, said he would continue to push to revamp Yahoo Inc's board of directors following Yahoo's decision to reject him as a board member.

In a letter to Yahoo CEO Scott Thompson on Wednesday, Loeb blasted Yahoo for excluding shareholders from its board and accused the company of making a mockery of sound corporate governance principles.

Third Point, Yahoo's largest institutional shareholder with a 5.8 percent stake, has launched a proxy fight to appoint four directors to the struggling Internet company's board of directors.

Yahoo's market capitalization stands at less than half of the $44.6 billion Microsoft Corp offered for the company in 2008, giving Third Point a potentially rich vein of investor discontent to tap.

While some observers expected Yahoo and Third Point to reach a compromise that would avoid a drawn-out proxy fight, so far the two sides have failed to find common ground.

On Sunday, Yahoo announced the appointment of three new directors hand-picked by the company.

Yahoo also said its board had offered to propose one of Third Point's four nominees, Harry Wilson, and a second person acceptable to both Yahoo and Third Point to join the board in order to avoid a proxy fight.

But Yahoo said giving a board seat to Loeb would not be in the best interest of the company.

In his letter, Loeb took issue with Yahoo's reason for rejecting him, which he said was based on the notion that he would not be additive to the board and that he would be conflicted because of his stake in Yahoo.

It is absurd to assert a 'conflict' that would render a board member unqualified based either on ownership or a sense of urgency to repair a company that has been - by your own admission - languishing for years, Loeb wrote.

Yahoo's revenue declined more than 20 percent last year, at a time when the businesses of Web rivals Google Inc and Facebook saw healthy growth.

Loeb argued that his interest in Yahoo was not solely focused on short-term results.

He noted that Third Point had advocated that Yahoo hold on to its 40 percent stake in Chinese Web giant Alibaba Group. H e said the stake had more value than was generally understood, and Third Point had suggested that Yahoo retain the stake unless it can get fair value.

Last month, negotiations collapsed between Yahoo, Alibaba and Japan's Softbank Corp involving a complex $17 billion tax-free asset swap. The deal would have seen Yahoo part with a big chunk of its stake in Alibaba.

Yahoo had no immediate comment on Loeb's letter.

Shares of Yahoo were down 12 cents at $15.31 in Wednesday afternoon trade.

Loeb said his firm remained willing to engage further, but will not deviate from our demand for badly needed shareholder representation.

(Reporting By Alexei Oreskovic; editing by John Wallace)