Most of the internet company’s $33bn (£21.8bn) value is attributed to its shareholding in Alibaba.
The decision is the opposite of the strategy announced in January to spin off its 15% stake in Alibaba.
Yahoo’s internet business will now be put into a new company to be listed on the stock market.
Investors in Yahoo will get shares in the new company on a pro-rata basis.
Yahoo bought 40% of Alibaba in 2005 for $1bn. The current holding is worth about $30bn.
Chief executive Marissa Mayer said the new plan would help ensure that Yahoo’s internet business was “accurately valued”.
She also said she was “taking further steps to tighten our focus and prioritise our investments to drive growth”.
More details about the move will be outlined in late January when Yahoo announces its fourth-quarter results.
The plan to spin off the Alibaba stake hit a hurdle in September when US tax authorities denied a request from Yahoo to decide whether the deal would be tax-free.
Yahoo shareholders could have ended up paying billions of dollars if the deal was ruled to be taxable.
Analysts said Wednesday’s announcement could make it easier for Yahoo to sell its internet business. They include websites, mobile apps and advertising services and could be worth between $3bn and $5bn.
Roger Kay, analyst at Endpoint Technologies Associates, said Yahoo’s internet business still had some value, given its huge global audience and expertise in online advertising.
“I don’t know if Marissa Mayer is the right person to lead to company out of the desert, but it can be done,” he said. “I think after the spin-off, it will establish its own level of value.”
Yahoo chairman Maynard Webb denied there were plans to sell the internet businesses.
“We believe that we are tremendously undervalued and we think the best path to unlocking that value is by separating the Alibaba assets from our operating businesses and also turning around the performance in our operating business,” he said.
Obtaining the necessary shareholder and regulatory approval meant the Alibaba transaction could take as long as a year to complete.
Shares in Yahoo rose 0.6% to $35.08 in morning trading in New York.
Ms Mayer, 40, is expecting to give birth to twin girls this month, but plans to take only a short period of time off work.
She returned to work just two weeks after giving birth to her first child in 2013.