Yahoo! and eBay have formed a broad strategic partnership spanning advertising and online payments, designed to fend off competition from fellow internet leaders Google and Microsoft.

Under the deal, Yahoo! will be the exclusive third-party provider of graphical adverts for eBay, the world’s largest online auction house. Meanwhile, Yahoo! will use PayPal, the payment service owned by eBay, across its sites.

News of the agreement, which comes after widespread speculation of an impending "super-union" between two or more of the internet's most powerful companies, was welcomed by the markets.

Shares in eBay rose 7.2 per cent to $32.38 in morning trade in New York, while Yahoo’s stock gained 3.1 per cent to $32.78.

"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," Terry Semel, the Yahoo! chief executive, said.

Shares of Google, Yahoo’s chief rival, fell $3.44 to $377.80. Microsoft, the world's largest software developer which had also been in talks with eBay but looks to have ultimately been left in the cold, traded flat.

Emily Riley of Jupiter Research, told Reuters: "Any time two large companies enter into a partnership like this, there is always going to be somebody that is the loser. In this case I think everybody is looking toward Google, wondering if they were in the running too."

Youssef Squali, and analyst with Jeffries & Co, said: "The biggest component here is the ability to monetize eBay traffic with Yahoo’s brand. We see it as positive for both parties."

No financial terms of the deal were disclosed. However, the companies did say that they would begin to roll out initiatives related to the agreement this year prior to a full launch next year.

There will also be a co-branded desktop toolbar, which will integrate Yahoo’s search tools and e-mail service into eBay’s existing toolbar, which has been downloaded by around 4 million eBay users.

The two companies will also explore the use of "click to call" technology through Skype, the market leader in internet telephony that was bought by eBay for up to $4.1 billion (£2.2bn) last year.

Click-to-call online adverts will allow consumers to call vendors via internet telephone systems.

Neither companies expect the deal to have an impact on financial results in 2006.

It is thought that eBay's was prompted to enter talks with both Yahoo! and Microsoft late last year when Google entered eBay's market with the launch of an online classified advertising site.

Industry observers have noted that Google, which has a cash pile of $10 billion, has recently begun to act as a venture capital firm, investing in a string of online projects and placing bets in a number of areas.

That activity has seen Google extend well beyond its core search business. The company's entry into online voice communications last year with the launch of GoogleTalk threw down the gauntlet to Skype.

Meanwhile, sites such as eBay have relied on Google to drive consumers to them, a relationship that has benefited Google's partners, but could leave them vulnerable to changes in policy from the search-market leader.

Google has also been hugely supportive of opensource software developers, such as the non-profit Mozilla foundation, which compete aggressively with Microsoft, the world's largest software house.

Google executives have themselves said they believe that "co-opetition" - alliances between potential competitors - will become more common as companies battle for revenues amid the complex web of corporate relationships that have developed in the online sector.

Meg Whitman, eBay's president and chief executive officer, said: "Yahoo! offers an engaged online audience, which drives massive traffic through its rich consumer content and premium services. Working together, we can create more exposure for our properties."

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