Microsoft may sweeten its bid to acquire Internet-giant Yahoo, according to one analyst, sending shares of the firm higher in Tuesday trading.

Citigroup said it is likely Microsoft will raise its $31-per-share offer for Yahoo, and upgraded Yahoo shares to buy from hold, saying the intrinsic value of the Internet company make a higher bid worth the effort.

Despite three to four years of making online advertising a key strategic priority, Microsoft has yet to demonstrate traction, said Citigroup's Mark Mahaney, adding that the company's share of the online ad market in the U.S. actually declined fractionally in 2007. We believe the likelihood of Microsoft of walking away from the deal is small.

Shares rallied $1.21, or 4.40 percent on the Nasdaq in Tuesday trading, closing at $28.73.

The brokerage raised its price target on Yahoo's stock to $34 from $31, saying it believed Microsoft remained committed to its offer and is capable of and willing to increase that bid to conclude the deal.

While we continue to see no other competing bidders, we believe Yahoo is aggressively pursuing strategic alternatives, analyst Mark Mahaney said in a note to clients.