Google has launched an online payment system in a head-on challenge to PayPal, the current market leader owned by eBay, the internet auction house.

The launch of Google Checkout in the United States places the internet search and advertising company at the centre of the rapidly expanding online money-transfer business. Such a move had been widely anticipated, with many expecting the service to be called "GBuy".

Users of the Google service will be able to use it to pay for goods and services at participating e-tail sites. Google hopes that consumers will turn to the payment system after they trawl the web using Google's search engine and its retail site, Froogle, to find the best prices.

Earlier this year, Eric Schmidt, Google's chief executive also suggested that Google's large lead in online search-related advertising would give an affiliated payment service a sharp advantage over PayPal.

"The precision of this targeting could be revolutionary,'' Jordan Rohan, an analyst with RBC Capital Markets, recently said.

Salar Kamangar, Vice President of Product Management at Google, said: "By integrating the checkout process with search and advertising, we’re helping our users complete the cycle of searching, finding and buying.

"Many shoppers decide what they want to buy by using search, but in the end they often don’t complete the transaction online because they find the checkout experience complex, inconvenient and uncertain."

The launch of the system marks an all-out assault on a crucial part of eBay's business. The online auctioneer, one of Google's biggest advertisers, bought PayPal for $1.5 billion in 2002. It now claims 105 million user accounts and processed $8.8 billion in transactions during the first quarter of the year.

However, Jeffries & Company, the Wall Street broker, suggested that the risk to PayPal would be limited in the short term, noting that a large percentage of PayPal revenue comes from eBay transactions and that PayPal is eyeing growth in international markets.

Merchants will pay Google 2 per cent of each transaction, plus a fee of 20 cents - less than the amount charged by credit card companies.

Google will also waive the fees on $10 worth of purchases for every $1 a company spends on search advertising, in a fees system that will effectively offer advertising clients who use Google Checkout a rebate on their advertising spending.

PayPal charges a 2.9 per cent standard rate, plus a 30-cent fee, but offers discounts to users who sell more than $3,000 worth of goods in one transaction.

Yahoo!, Google's largest competitor in search related advertising recently announced a partnership with eBay in a tie-up designed to head-off the growing threat from Google. That deal allows Yahoo advertisers to use PayPal to process payments.

The move into payment services will allow Google to tap into an expanding area which is being driven by the growing willingness of people to spend money online.

However, it will also make it a target for fraudsters.

Microsoft, Citibank and Yahoo! all failed to grow successful online payment businesses. EBay's decision to acquire PayPal came after its own service misfired.

The searchenginewatch blog said the service would also raise concerns among sellers that Google has the power to learn more about their businesses than they are comfortable with.

"This will surely raise concerns about what Google is doing with the data it's collecting, as it now has visibility into searcher buying behaviour from the first initial queries through the entire clickthrough and conversion process," it said.

Analysts also suggested that advertisers on Google's search engine who use the Checkout system could attract more clicks as their web addresses will be preceded by a logo for the new service. That would mean Google would rank their ads higher on search results pages.

"This will create a conundrum for some search marketers: Which is more important—a high ranking ad or not allowing Google such a complete view of your search-related business transactions?" searchenginewatch said.

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