Who Will Be Twitter’s Bestest Search Friend? Google and Microsoft Engage in Yet Another Pick-Me Face-Off.

[UPDATED: With added information about range of product discussions.]

In this digital era’s version of “Spy Vs. Spy,” Microsoft and Google find themselves in yet another sharp-elbowed battle to be the one to strike some kind of commercial search deal or product partnership with Twitter, many sources with knowledge of the situation said, as they also jockey for position to evaluate the potential of the much-hyped microblogging start-up.

After last week’s explosive rumor that Google was in “late-stage” talks to acquire Twitter, which BoomTown reported was wildly premature, I set out to try to sort out exactly what was going on.

As I found out, there was a lot–mostly much talking related to possible product and distribution partnerships, centered around Google or Microsoft, especially around a deal to become the one to exclusively deliver search or other similar services to Twitter properties.

The reason for the interest? Many think Twitter’s real-time search of its 140-character “tweets” posted by users on the service will become the next great battlefield in search. Google currently dominates the general search market, with third-place Microsoft struggling to get more share.

But how to do that is in flux, as past efforts at various third-party search arrangements have had mixed success for both Google and Microsoft. Both companies and also Twitter are trying to figure out new ways to do such deals.

On top of that, it is also unclear if Twitter wants to strike a deal purely to get a payment from either Microsoft or Google, as others have done. Twitter management has indicated that they are much more interested in growth and distribution over a revenue focus.

Twitter Co-founder Biz Stone said as much on the start-up’s Web site recently, as well as in many media interviews, noting that it will begin experimenting with its own business ideas this year.

In other words, the talks Twitter is having with both Google and Microsoft could also lead exactly nowhere too.

Along with the commercial talks, both Microsoft (MSFT) and Google (GOOG) are also trying to figure out if Twitter is simply one of the many shooting stars that are far more typical in Silicon Valley or if it is sea-change start-up worth pursuing and paying up big-time to acquire.

“As impressive as what Twitter has done, we are all overexcited,” said one source. “And so it’s hard to figure out the right thing to do with all the pressure to do something.”

Thus, while an offer for Twitter from Microsoft, Google or a plethora of other players–from News Corp. (NWS) to Yahoo (YHOO) to Cisco (CSCO) to Time Warner (TWX) online unit AOL to big telcos–could come at any time, said many sources, only a huge price would lead to an acquisition, especially since the growth of the service has been accelerating more rapidly in recent months than has been reported publicly.

This all makes for dicey times at Twitter, which sits at the center of all this noise, trying to build a company, while also being fully cognizant that trying to engineer a massive buyout could be its best outcome.

Further complicating the situation: The fact that Twitter co-founder and CEO Evan Williams–who has already sold one company, Blogger, to Google and eventually left after a lackluster experience, a common one of many entrepreneurs who sell out early to large companies–is less interested in selling out than in growing the company.

But without the kind of control of the company’s fate–which allowed Facebook founder and CEO Mark Zuckerberg to effectively block similar buyout pressures early in its history–Twitter’s founders also might not get the last word in the event of an unusually attractive offer.

While a $500 million stock-and-cash one from Facebook last fall was turned away by Twitter due to worry about the social-networking site’s market valuation, the massing interest is overwhelming and forcing it to make some clear decisions about it path.

“When you are in a situation like Twitter is in, you have to wonder if this is the high-water mark and it is time to sell out or if you are underestimating yourself badly by even considering that,” said one Silicon Valley entrepreneur who has been in a similar spot in the past. “It can be very hard to think straight.”

Indeed, all the attention is both distracting and slightly surreal for its top execs and small 30-person staff in San Francisco, said many sources close to the situation, especially the mass of media that resulted due to that now-discounted rumor that Twitter was poised to be sold off for a giant pile of money.

In fact, Twitter has its hands full enough scaling its recent surge in growth and keeping the service humming along (it has had tech snafus in the past).

But for Google and Microsoft, this geopolitical one-upsmanship by the Internet’s two most important companies is quite familiar, and they have not hesitated to jump into the Twitter tempest.

If that sounds a lot like the two-month fire drill in 2007 that resulted when Microsoft and Google competed to see who could sidle up closest to then-belle-of-the-Silicon-Valley-ball Facebook, you are exactly right.

After much huffing and puffing back and forth and this way and that way, it resulted in a Microsoft “win,” which gave it the distinct honor of forking over $240 million to own 1.6 percent of Facebook at an astonishing $15 billion valuation.

Even as Facebook has grown quickly in size since then–to 200 million users, as announced yesterday–its valuation has dropped to $3 billion to $5 billion.

Microsoft had previously struck an search ad deal in the U.S. with Facebook in which it paid a guaranteed revenue to Facebook and later also did a deal to do some of the search on the site.

Such kinds of deals have become common for both Google and Microsoft in recent years. Google struck one with News Corp. social-networking site MySpace, as well as with AOL (which will also soon come up for renewal).

And Microsoft grabbed the right to pay Digg a guaranteed fee in another online ad deal. And the pair also fought more recently over a mobile search distribution deal with the wireless unit of Verizon (VZ).

And so it goes now with Twitter.

No partnership deal has been made as yet, of course, since such a thing would say a lot about Twitter’s future, since the prospect of marriage overhangs such a choice, which is also–in essence, a declaration of allegiance in the cold war between Google and Microsoft.

If that also sounds like a plot of a James Bond movie, with geeks armed with algorithms instead of gadgety weaponry, you’re also exactly right.

More, obviously, to come…

Please see this disclosure related to me and Google.

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