Yahoo's second biggest investor called-on Microsoft to increase its 42 billion bid for the web giant, and also increased pressure on Yahoo by saying it had few options left, increasing the pressure on the two companies to seal a deal that Yahoo had rejected earlier.

In a quarterly letter to investors, released on Tuesday, Bill Miller, the star-picker at U.S. asset manager Legg Mason, said the best value for Yahoo would be about $40 per share compared to Microsoft's original offer of $31 per share.

It will be hard for Yahoo to come up with alternatives that deliver more value than Microsoft will ultimately be willing to pay, said Miller. We think this deal is a strategic imperative for Microsoft and Yahoo is in a tough spot if it wishes to remain independent.

Legg mason Capital Management, the unit of Legg Mason run by Miller, owns more than 80 million Yahoo shares or 6 percent of the company while Capital Research & Management has 11 percent shares.

The statement came shortly after Yahoo formally turned down Microsoft's bid on Monday, which is now valued at $ 41.7 billion, saying Microsoft did not properly assess Yahoo's large audience, online advertising investments, cash generation and growth prospects of its overseas holdings.

The Washington-based Microsoft, Redmond said it reserved the right to pursue all the necessary steps for the Yahoo take-over although it never specified whether it planned to take the bid to Yahoo share holders.