Google, facing possible anti-trust scrutiny from the Justice Department, has moved to address privacy concerns by setting a nine-month limit on the time it stores the IP addresses that allow it to connect search behavior to a particular user.

The posting on the Google blog by Peter Fleischer, global privacy counsel, Jane Horvath, senior privacy counsel, and Alma Whitten, software engineer, acknowledged the policy change, which halves Googles previous 18-month storage policy, comes in response to “regulatory concerns.”

The Wall Street Journal reported that the U.S. Department of Justice has hired Sanford Litvack, a former Walt Disney executive and Justice Department anti-trust czar in the Carter Administration, to launch a possible court case to head off Google’s cooperative search-advertising deal with Yahoo. That deal, under which Yahoo would outsource much of its search advertising to Google, also has come under fire from top advertisers. The Association of National Advertisers, which represents top advertisers like Procter & Gamble, sent a letter to the Justice Department warning that the deal would curb competition and raise prices.

In a research note, UBS analyst Benjamin Schachter (no relation to the reporter) said the Yahoo deal, which adds less than $50 million per year in addition cash flow, has “limited near-term impact” on Google.  While the deal would add an estimated $250 million to $450 million per year in incremental cash flow to Yahoo, Mr. Schachter said he continues to believe it hurts Yahoo’s business strategically.

The Yahoo deal, however, may be only the beginning of Google’s regulatory hurdles.

“Although we think the current focus is the [Yahoo] search deal, we worry (and expect) that [Google] will continue to attract regulatory oversight into its other businesses as well,” he said.

Shares of Google fell $4.40, or 1.1 percent, to $415.55 in late-morning trading, while Yahoo declined $.39, or 2.1 percent to $17.87.

Yahoo cobbled together the search deal with Google in June as the company sought to fend off an uninvited merger bid by Microsoft and a proxy challenge from billionaire investor Carl Icahn.

In March 2007, Google began a policy to “anonymize our search server logs,” the blog said. But regulators in the United States and Europe continued to press the company about how its collection of individual IP address—a key element in delivering targeted advertising—addressed privacy concerns.

Google said that addressing privacy issues can be a balancing act.

“The problem is difficult to solve because the characteristics of the data that make it useful to prevent fraud, for example, are the very characteristics that also introduce some privacy risk,” the blog said. “So, it's difficult to find the perfect equilibrium between privacy on the one hand, and other factors, such as innovation and security, on the other.”

Ed Kohler, writing on the Technology Evangelist blog, questioned whether Google would be able to zero in on users’ preferences with the shorter IP address holding period.

“What if I WANT Google to know more about me for longer?” he asked. “Now that they've dropped the time period to under a year, will I see less relevant results on searches I conduct annually?”