The internet search company has a $10 billion war chest and is pursuing YouTube as it looks to build on its fledgeling Google Video business by acquiring the industry leader.

Roger Kay, president of Endpoint Technologies, a US consultancy firm, said: “A deal between Google and YouTube would make huge sense. Video is the new frontier and if Google can lock up the most popular video site, it is on to a great thing.

“There is huge potential for video on the internet as improvements in technology allow higher resolutions, larger frames and higher frame rates. Video is immediate and it speaks to everyone.”

The talks are at a very early stage and could lead nowhere. However, if a deal is struck it would mark an extraordinary accumulation of wealth for Chad Hurley, Steve Chen and Jawed Karim, co-founders of YouTube. It would also give Sequoia Capital, the Silicon Valley venture capital firm that has invested at least $11.5 million in the business, a superb return on its capital. Sequoia’s past investments include Google and Yahoo!

Since it was founded in a garage less than two years ago by three former staff of PayPal, eBay’s electronic payment unit, YouTube has become by far the most visited video site on the internet. It surpassed 20 million users in May and has added a further 14 million since. Its 34 million viewers watch about 100 million videos a day on the site. Microsoft’s MSN Video site, the second biggest player, has about 12 million users.

YouTube began as a site dedicated to video clips uploaded by its users. But last month it signed a deal with Warner Music that gives its users free access to songs and videos from its entire stable of artists, including Madonna and Green Day.

But Google would also inherit problems as well as benefits if it buys the company. Last month Doug Morris, the chief executive of Vivendi’s Universal Music Group, told his investors that “copyright infringers” such as YouTube and MySpace “owe us tens of millions of dollars”. Mr Morris was referring to the use of pop songs as background music in YouTube amateur videos as well as the Universal artists’ own productions on the website.

YouTube also faces competition from other video providers such as Microsoft, Yahoo! and MySpace, which all seek to win a share of this lucrative market.

Of the founders, Mr Hurley is now chief executive and Mr Chen is chief technology officer. Mr Karim has left the company.

Both companies declined to comment on the talks.

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