Google is rumoured to be in talks to buy YouTube, the video sharing website, for around $1.6 billion.

The leader in search advertising, Google is known to regard video as a crucial area for its future. It already has its own Google Video site, but still trails YouTube, which recently announced that it shows 100 million videos a day, by a large margin.

It also has billions of dollars in cash on hand to fund any acquisitions and is buying small companies "at the rate of one or two a week" according to industry insiders. Google CEO Eric Schmidt and co-founders Larry Page and Sergey Brin are believed to have hosted a number of high-level meetings this week, with the company's video strategy high on the agenda.

News of the YouTube talks was first reported on the Techcruch blog.

The two companies are already linked by their choice in venture capital backing. YouTube was launched in February last year by Chad Hurley, 29, and has raised at least $11.5 million (£6.1 million) from Sequoia Capital, the venture capital firm that backed Google. It is estimated that Sequoia invested $12.5 million in Google and that its stake in the online search engine was worth $1.5 billion when it floated in 2004.

Sequoia’s investment in YouTube is overseen by Roelof Botha, who is a director of the website. Before joining Sequoia in 2003, Mr Botha was chief financial officer of PayPal, which was bought by eBay in 2002 for $1.5 billion.

After this summer's Sun Valley conference in the US, the annual gathering of media executives organised by the investment bank Allen & Co, it was speculated that YouTube could command a price tag of $1 billion. Weeks later a figure of $2 billion was suggested. However, several analysts have disputed those sums, citing potential copyright issues with much of the content posted on the site.

YouTube has recently sought to cash in on its exploding popularity by adding advertising to the videos shown on its site. In August it launched its first "branded channel", a platform that will allow advertisers to promote products through customised web pages.

The move marked a change in strategy for YouTube, which had previously focused on providing a forum for members of the public to post home-made videos rather than reaping profits. It came as the company takes part in talks with record labels, including EMI and Warner Music, over plans to make more music available on the site and amid speculation that YouTube’s backers would head to market when advertising revenues begin firing.

However, competition is growing. Microsoft recently entered the video sharing arena with its Soapbox site. Rumours are also circulating that Skype founders Janus Friis and Niklas Zennstrom are preparing a YouTube competitor under the codename "The Venice Project". Reports have suggested the site will focus on professionally produced content.

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