Eric Schmidt, the chief executive of Google, has signalled that the internet search leader intends to strengthen its ties with Apple and up its assault on Microsoft's Office software.

Mr Schmidt joined the board of Apple, the iPod maker, last year.

Questioned at the Morgan Stanley Technology Conference in San Francisco over rumours that Google is looking to develop a handheld gadget that could compete with Apple’s iPhone, he said: “I will tell you that Google and Apple are doing more and more things together through the normal course of communications ... We have similar goals and similar competitors.”

Pointedly, in January Mr Schmidt did not appear at the Consumer Electronics Show in Las Vegas, the main industry trade fair, opting instead to take the stage at Apple’s parallel event in San Francisco, where the iPhone was unveiled.

However, with search accounting for the vast majority of Google’s revenues, the company is under some pressure to diversify from its core internet advertising business.

Mr Schmidt said that web-based software services would boost sales going forward.

Last month Google launched a package of business software services that includes a word processor, spreadsheet and an e-mail account.

Companies that sign up for the service will pay Google $50 a year per user for a guaranteed level of service.

The Google Apps product is regarded by analysts as a serious challenge to Microsoft’s dominant Office software.

The software is run from Google’s growing array of data centres, huge server farms in which the company has invested heavily. Customers’ PCs effectively become dumb terminals, used only to access the service over the web.

Mr Schmidt also discounted talk that Google could use its vast cash reserves to fund acquisitions.

At the end of last year, Google had amassed more than $11 billion (£5.7 billion) in cash and marketable securities on its balance sheet, a 40 per cent increase on a year earlier.

Yahoo!, the second-placed player in the online advertising market, has been mooted as a possible target.

However, Mr Schmidt said that the market is not yet ready for consolidation.

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