Bloomberg reported on Wednesday, citing people familiar with the matter.
Yahoo's shares recouped some of their losses following the report and were down 2.3 percent at $36.64 in midday trading. They had dropped as much as 3.7 percent earlier.
AT&T had previously decided against making an offer, people familiar with the matter told Bloomberg in April.
Reuters, citing sources, reported on April 29 that Yahoo had shortlisted close to 10 bidders in an auction for its internet business, including Verizon Communications Inc, the biggest U.S. wireless carrier.
While Verizon remains a favorite, it didn't submit one of the highest first-round bids, Bloomberg reported on Wednesday, citing two of the people.
Digital advertising company YP Holdings LLC, which is backed by AT&T, is no longer pursuing a bid, the report said.
Yahoo declined to comment, while AT&T did not immediately respond to a request for comment.