Tech Observers cited unnamed sources as saying the US technology titan and the pioneering Finnish mobile phone company have been involved in serious talks that recently suffered a setback.
Microsoft has been striving to gain ground in a global smartphone market dominated by handsets powered by Google-backed Android and Apple iOS operating systems.
Nokia has seen its past glory fade under pressure of competition from Apple and Asian mobile phone makers.
Microsoft and Nokia joined forces about two years ago in an alliance aimed at making inroads with handsets powered by Windows Phone software.
Windows, boosted by the Windows Phone 8 introduced last year, boosted its US market share to 5.6pc from 3.8pc, according to a recent Kantar Worldpanel ComTech survey.
Sources say that Microsoft and Nokia were until recently in “advanced” discussions about a possible merger, although talks between the two companies have apparently broken down.
Microsoft reportedly walked away from the deal “because of the price and Nokia’s own strategic predicament, where it ranks as a trailing player to Apple and Samsung.”
This is somewhat ironic since Nokia is far and away the top Windows Phone OEM and a merger with Microsoft would be one sure-fire way to give it more resources to help it compete against the mobile industry’s major players. Microsoft declined to comment on it.