The billionaire, who is leading a group of investment funds holding 3 percent in shares and options of the media company, threatened to hold Time Warner Chief Executive Richard Parsons and the board "personally liable" for any "breach of fiduciary duty" in forging any AOL deal.
Time Warner is in talks with Microsoft and Google to create an Internet advertising venture, sources said. Time Warner has acknowledged the talks but has declined to say which companies it is negotiating with.
Icahn maintains that Time Warner is shutting out one or more bidders that may want to buy all or part of AOL, but that the company is not willing to sell. He said a new board would be more capable of making decisions to boost its share price, which has not risen substantially in three years.
"We're concerned that they will do something that would prevent others from enhancing shareholder value by possibly purchasing control of AOL or a combination of AOL with other parts of Time Warner," said Icahn in an interview.
Time Warner said Icahn should not worry.
"Obviously we have a deep understanding of the AOL business and its value potential," a representative said. "Any relationship we pursue will protect and enhance shareholder value."
The dissident shareholder group has engaged investment bank Lazard to seek ways to boost Time Warner shares, including breaking the company up. Time Warner owns Time Warner Cable, Home Box Office, AOL, Warner Bros. Entertainment, New Line Cinema, the Time Inc. magazine group and Turner Broadcasting, the parent of CNN.
Icahn's group, which includes hedge funds SAC Capital Advisors, Jana Partners and mutual fund Franklin Mutual Advisers, has been rapidly building a larger stake in New York-based Time Warner.
Since Nov. 29, the group has added about 2.3 million shares and options to its collective holdings, giving it a stake of 137.7 million, or about 3.01 percent in Time Warner, according to regulatory filings.
The group has said it plans to nominate new candidates to fill "a majority" of the board of Time Warner, which would give it control of the company.
Time Warner shares closed at 18.12 on the New York Stock Exchange, up 13 cents.