Feb 19 - Yahoo Inc officially launched the sale of its core business on Friday, a move seen as a positive step for frustrated investors but not enough to keep an activist hedge fund from pursuing a proxy fight against the struggling Internet company.

Yahoo shares jumped after the company announced its board has formed a committee of independent directors to explore strategic alternatives, and that it has hired investment banks and a law firm to run the process.

The launch of the auction process, a move activist hedge fund Starboard Value and other shareholders have pushed since late last year, showed the company was moving another step closer to selling its core business, which includes search, mail and news sites, rather than spin it off as previously planned.

The move follows more than three years of effort by CEO Marissa Mayer to turn around Yahoo by focusing on mobile apps and trying to boost advertising revenue.

Yahoo had acknowledged during its earnings last month that it was open to exploring options for its core business.

Despite the launch, Starboard's founder Jeffrey Smith is not backing down, and will continue his pursuit of nominating a group of directors for the Yahoo board, people familiar with the matter said.

Smith stated in a letter to the board on Jan. 6 that if the board is unwilling to accept the need for significant change, "then an election contest may very well be needed so that shareholders can replace a majority of the Board with directors who will represent their best interests."

Even though the board is showing that it's now willing to accept that need, Smith is still going to nominate a slate of directors to ensure that the sales process is handled properly, people familiar with the matter said.

The window for a shareholder to nominate a director or group of directors to the Yahoo board begins on Feb. 25 and ends on March 26, with the annual meeting expected to be held in May, according to the company's proxy statement.

"It seems pretty clear that the only reason this is happening even is because of the threat of the proxy fight," Pivotal Research analyst Brian Wieser said.

Starboard, which owns about 0.75 percent of Yahoo, declined to comment.

Yahoo's attempt to sell its core business comes after shelving previous plans to spin off its stake in ecommerce giant Alibaba Group Holding Ltd.

"Separating our Alibaba stake from Yahoo's operating business is essential to maximizing value for our shareholders," Mayer said on Friday.

Yahoo's board is concerned about the risk of losing a possible proxy contest, investor Eric Jackson, of SpringOwl Asset Management, said.

Yahoo's committee of independent directors has engaged Goldman Sachs & Co Inc, J.P. Morgan and PJT Partners Inc as financial advisers, and Cravath, Swaine & Moore LLP as legal adviser.

Verizon Communications Inc is among the companies seen as a potential buyer of Yahoo's core business.