We heard a couple of days ago that Microsoft (NSDQ: MSFT) and Facebook were working on a major extension of their current deal. Now the Wall Street Journal is reporting that Microsoft is talking to the social network about an equity stake and an investment that could value the start-up at $10 billion. Citing “people familiar with the matter,” the Journal says the talks—said to have originated with Microsoft—could be for a stake as large as 5 percent; that would be roughly $300 million -500 million. Talks are preliminary and Google (NSDQ: GOOG) is expected to once again try to play spoiler for a Microsoft deal. No comment for WSJ from Microsoft or Facebook. The NY Post reported in late 2006 that Facebook wopuld have to pay Microsoft a break-up fee. Much more in extended entry…

Update: This follows Kara Swisher’s report earlier this month that Facebook is interested in raising a large, some might say massive, institutional round for acquisitions and to buy IPO time. As for the $10 billion figure, over the summer early investor Peter Thiel said if someone offered $10 billion, the company “probably would listen to them.”

Current deal with Microsoft: The initial deal making Microsoft the exclusive provider of banner advertising and sponsored links on Facebook signed hastily in August 2006 was described as a “multiyear collaboration.” Reports then put the length at three years but earlier this year it was reported to guarantee of $200 million in ad revenue through 2008—and to have been extended through 2011. Adding to the mix: in late 2006, the NYPost reported Facebook would owe Microsoft a break-up fee if acquired by another company. 

Updated 2: NYTimes: There may be personal reasons that Facebook would align itself with Microsoft, the story say…Zuckerberg has a personal friendship with Ray Ozzie, Microsoft’s chief software architect. Also, Jim Breyer of Accel Partners and Facebook’s board member, was an investor in Groove Networks,  Ozzie’s company, which Microsoft purchased in 2005.