Yahoo (with their Instant Messenger product), in apparent desperation, is treading the fine line between adware/malware and legitimate software. I think it has crossed the line. You decide.

First Yahoo updater automatically checks the internet for the new version and then nags you repeatedly and painfully till you submit. I was in a hurry. I simply clicked through their default options as fast as I could to get it over with and focus on my job. I didn't like it one bit.
The result was horrendous. You are in for big nasty surprises.

It affects Internet Explorer, Firefox and more.

Firefox
It changed my Firefox browser preferences to make Yahoo site as my default home page. It happened few times before I noticed.

It changed my search extensions to bring it as the default search engine, instead of Google. Now everytime I was searching I was presented with Yahoo search results which obviously is much poorer than Google.

Internet Explorer
It installed Yahoo toolbar in Internet Explorer.

It changed my autosearch settings in Internet Explorer. Not only that it will persistently nag you to change it back to Yahoo, if you manually or otherwise change the settings.

Other
It installed tons of games and other junk for which I have absolutely no use ever.

I am sure it did other changes but I was frustrated enough already.

Update: I found several other changes to the system, too numerous to list. More later on how to remove them.

And then comes the crown jewel.

Not only all that but now it has accessed all my contact information from MS Outlook and displays them in the messenger. I wouldn't be surprised if it decides to use them for touting its product and services. I have seen enough to believe that it is a strong possibility.

That was the final straw. I promptly uninstalled Yahoo Messenger with all its accessories.

And all this punishment was simply because I was tired of its nagging and was forced to upgrade my Yahoo Instant Messenger.

The solution to their intrusions is simple:
Uninstall their programs individually from Control Panel/Add Remove Programs.

Deny Yahoo Updater access to the internet using your Firewall. Use ZoneAlarm if you need a free firewall.

Uninstall Yahoo toolbar by using their uninstall link.

Update: All of the above doesn't fully clear your system of yahoo junk. Use HijackThis utility to clean the rest.

Solution to their services:
Use Google or any other IM for IM needs. Request your friends to do so. Otherwise you can use any Jabber clients like neos.

Update: If you want to stick with Yahoo IM, use Trillian (free version available) instead. I have switched to Trillian thanks to suggestions in the comments below.

Use Skype instead of Yahoo's voice services.

Note: I haven't exhaustively checked if they have kept any remaining traces of their intrusive software on my hard-drive. You can be rest assured I will check and you will hear about it if they did.

Update: As I informed above it does make several other changes to the system which will be apparent when you run HijackThis utility.

Ben Edelman previously wrote about how Yahoo! funds spyware by allowing it's ads to be syndicated to notorious spyware miscreants.

Update: I realized news.com already reported about Yahoo's Spyware tactics. Here are further details:

By accepting Yahoo's "typical" installation of YIM with Voice, it will also download Yahoo's Search Toolbar with anti-spyware and anti-pop-up software, desktop and system tray shortcuts, as well as Yahoo Extras, which will insert Yahoo links into the Internet Explorer browser. The IM client also contains "live words," which will automatically show an icon when the user highlights words online and then hyperlink to Yahoo search results, definitions or translation tools. Finally, the installation will alter the users' home page and auto-search functions to point to Yahoo by default.

To avoid these changes, users must actively choose the "custom" installation and uncheck five boxes.

Most people, unlike me, wouldn't notice most of these changes and would quickly become adapted to their inferior services.

"There are a ridiculously high number of people who never budge off the default," Everett-Church said, a principal at privacy consultancy PrivacyClue.

Can you imagine Yahoo sinking so low?

Nick W from Threadwatch was very eloquent:

Yahoo's Evil Spyware Tactics

What the fuck is going on with you guys? All that hard work over the last year or so to build reputation, and getting your mojo back and now it's all going to waste over stupid, evil tactics that should have been laughed out of the marketing room for the insane idiocy that they surely are.

Knobheads.

As far as I am concerned Yahoo IM is now ranked with other spyware/adware/malware in my book.

Shame on you Yahoo!