Youtube and Universal Music are in discussions over setting up an online music video service aimed at attracting premium advertising.

The service, with the working title of Vevo, could become the largest music site on the web, according to reports.

Under the plan, Google-owned YouTube would supply the online infrastructure and sales support to showcase Universal's content. The record company is the biggest in the world, with artists including U2, 50 Cent and the Killers.

The deal, if it goes ahead, would mark a significant step forward in Google's attempt to generate revenue from YouTube, which it acquired for $1.65 billion in 2006. It would also help to ease the music industry's search for greater profits from online music and video.

A deal would also represent a broadening of the sometimes fractious ties between YouTube and the media industry over copyright issues and licensing terms. Warner Music Group in December ordered YouTube to pull down all music videos on the site featuring Warner artists, after contract negotiations between the two sides broke down.

Universal, whose current licensing deal with YouTube expires at the end of March, is by far the most popular channel on YouTube. Its music videos have been viewed more than 3.5 billion times.

The deal would ideally be broadened out to include videos by artists at the other major music labels - Sony Music, EMI Group and Warner - in a concept similar to the TV shows available on NBC Universal and News Corp's Hulu.com, according to reports.

Sources told Reuters that many of the details, such as financial terms and whether the service would be run as a joint venture, were still being worked out.

"UMG CEO Doug Morris came up with this idea to do a Hulu for music but only with premium music content," said one of the persons familiar with the matter, adding that other music companies have expressed interest. "We literally just started negotiations."

Vevo could also tap other revenue streams through sales of items like concert tickets and merchandise, the sources said.

YouTube, the world's most popular online video site, has been under pressure to create more revenue and has introduced a range of advertising features. YouTube has also introduced technology to help media companies identify their music, videos or TV programs uploaded by the public so that they can choose to have the content taken down or place adverts on it.

Music companies are paid a share of the advertising revenue associated with their content on YouTube as well as a small sum for every time the video is viewed.

EMI is in contract renewal talks with YouTube. Sony Music renewed its contract with the online video site last month.

YouTube said in a statement: "We are always working with our partners to find creative ways to connect music, musicians, and fans."

Universal declined to comment.

News of the potential deal comes as other companies try out new ways to make money from online music. The four major music companies have done a deal with MySpace, the social networking site owned by New Corp, parent company of The Times, to create music streaming service MySpace Music from which ad revenue is shared.

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