Yahoo! and eBay join forces to fight Google

Under the partnership, Yahoo will be the exclusive provider of advertising on eBay's auction site, while Yahoo will use eBay's online payment system PayPal to allow its customers to pay for Yahoo services.

The two companies said they would also explore other areas of co-operation, including using eBay's voice-over-the-internet phone service Skype to offer advertisers "click-to-call" technology. This allows web users to click on an advert and be connected directly to a call centre, increasing the effectiveness of an ad.

Google dominates the $7bn-a-year internet search business and has been encroaching into Yahoo and eBay's territory. It is moving into classified advertising in a move that challenges eBay, and has launched gmail email services and other chat offerings that compete directly with Yahoo.

Google shares fell and Yahoo rose in trading immediately after the deal with eBay. Analysts said both Google and Microsoft would have wanted to gain access to eBay's army of customers, and the deal was seen as a particular blow to Microsoft. It has been investing heavily in its MSN network of consumer sites. It will also have a marginal effect on Google, which had been generating ads for eBay pages.

Yahoo had emerged as a favoured partner after talks in recent weeks. Shares in eBay surged almost 10 per cent.

"It's a very positive for move for both, since eBay gets to monetize its traffic with advertising," Susquehanna analyst Marianne Wolk said. "For Yahoo, it significantly broadens their search audience."

Yahoo and eBay are widely believed to have held merger talks at the height of the dot.com boom, and the partnership deal was seen yesterday as having reopened the possibility of a full combination between the two businesses.

Talk of a merger has been rife recently on Wall Street. It comes amid slowing growth and as competition among the biggest companies - Google, Yahoo, eBay and Microsoft's MSN - intensifies. Before yesterday, eBay's stock had been down 30 per cent on the year, while Yahoo was off 20 per cent and Google was down 10 per cent.

Yahoo and eBay said they do not expect the partnership to have a material impact on their financial results this year.

"Our consumers will benefit from the combination of Yahoo! and eBay's leading technology and services, providing them with one of the best online experiences," said Terry Semel, the chairman and chief executive officer at Yahoo! Inc. "Yahoo! holds a leadership position in all forms of online advertising. This partnership with eBay provides us with a great opportunity to further extend our sponsored search and graphical advertising reach to one of the largest and most active communities on the Web."