Search giant Google has launched an online payments system which aims to compete with auction giant eBay.

Dubbed Google Checkout, the system is designed to boost Google's main source of revenue - selling advertising. The service offers some free order processing to Google's millions of advertisers, but will initially be available only to stores in the US. EBay unit Paypal is the market leader in online payments.

EBay stock slipped ahead of Checkout's launch. Checkout's long testing process - it has been in the works for a year or more - has meant that rumours have been rife about the service, which many had dubbed "Gbuy" . Simple system Google says it will enable shoppers to set up a single account with all their credit card and delivery details, allowing online merchants to sell through their Google advertising. For every dollar they spend on advertising, merchants will get $10 off the cost of processing orders they receive. It's not going to kill Paypal Greg Sterling, analyst "It's a really smart move by Google, a wonderful way to close the loop with its advertisers," said Charlene Li of Forrester Research.

But she pointed out that since Google would be hanging onto information about customers, large retailers might be reluctant to give up the chance of collecting valuable marketing information themselves. And others said that Paypal's position was strong enough to resist the Google onslaught. "It's not going to kill Paypal," said Greg Sterling of Sterling Market Intelligence, saying that there was room in a market long dominated by Paypal for several such services. Commentators pointed out that the two services would not strictly be in direct competition, as Checkout relied solely on credit card payments.

The Google service will simply act as a transferring house, whereas Paypal has the facility for users to set up their own accounts to pay into - as well as offering credit card payments. Competition heats up Commentators have also warned that the move puts Google in direct competition with one of its biggest advertisers - eBay. EBay's shares have suffered as a result, dropping some 7% in the past week.

In a pre-emptive strike against the plans, last month eBay signed a deal with Google rival Yahoo. Under the deal, Yahoo, the largest internet media firm, will be the exclusive provider of branded advertising on eBay's site while Yahoo will use PayPal to let its customers pay for Yahoo services.

Of the names to sign up to Checkout so far, Starbucks and Buy.com have also retained Paypal as a method of payment as well.