Yahoo is expected to cut up to 700 jobs before the end of the year, which represents about 5% of the company's workforce.
The cuts will mark Yahoo's fourth mass layoff in the past three years and form part of the latest attempt by chief executive Carol Bartz to reduce costs, said the Financial Times.
Employees could be notified of the job cuts as early as today, according to US reports.
Most of the cuts are expected in Yahoo's US product groups as the firm focuses on new markets with the greatest potential for growth.
Yahoo's revenue has grown less than 2% to $4.8bn in the first nine months of the year, compared with Google's revenue growth of 23% to nearly $21bn in the same period.
The firm's difficulties have spurred speculation that buyout firms might put together a takeover bid for Yahoo, possibly in partnership with AOL.
Earlier this month, AOL was said to be exploring a merger with Yahoo. Analysts said the partnership would make strategic sense because Yahoo's homepage attracts audiences to its sports, finance, general news and e-mail, while AOL, has strengths in maps and entertainment news.