Google today played down speculation it is poised to battle Apple's dominance in the online music market, amid reports that the internet company is considering buying Napster, the one-time illegal music website.

However, despite Google's firm denial of interest in the company, shares in Napster surged more than 44 per cent early deals in New York today, to trade at $4.50.

It has long been thought that Google would eventually offer online music. The company, which currently earns the majority of its revenues through internet advertising, is under pressure to show it can leverage its powerful brand in other markets. It already offers video services where customers pay for content.

Google sources have also told Times Online that the company is concentrating heavily on developing digital rights management systems to protect content providers’ copyright. Such work would be a necessary precursor to Google developing its own online music service.

The company has owned the googlemusic.com domain since 2003.

Talk around a forthcoming Google music service reached a higher pitch last week, as a Bear Stearns research report suggested Google was working on "Google Tunes," with a test site expected in the next three to six months.

Robert Peck, an analyst for the American broker, said that offering music would be a "logical step" for Google. The company has already made some moves into supplying music information, launching a service that allows users to search for digital liner notes in December.

And rumours that it might pursue an acquisition in this area were fanned this morning when The New York Post reported that Google has been pushing to form an alliance with Napster.

The Napster site was closed down after the Recording Industry Association of America sued it in 1999 for allowing users to illegally share music. It has since been relaunched as a paid-for online music store.

Napster sources reportedly refused to comment on the rumours overnight in the United States, stating that the company is in a quiet period ahead of releasing results.

However, Google told Times Online today: "No, we have no plans at this time to develop a music store, or to compete with existing online and offline music retailers."

It added: "Most of the details included on 'music results' pages are links to third-party information and sites. We actually think this feature will help drive traffic for those retailers and music-related sites.

"And, because we include relevant AdWords ads on the 'music results' page, this new feature may also increase advertising opportunities for music and entertainment industry advertisers."

The company said it had "nothing to announce" regarding Napster.

However, speculation over a music deal is likely to continue, especially given Google’s recently discovered acquisitive streak. The company recently bought a 5 per cent stake in AOL for $1 billion. Earlier this month, it acquired dMarc, a company that automatically inserts adverts in radio broadcasts in a deal worth up to $1.136 billion over the next three years.

"With Google’s name recognition, and with the fact that their payment mechanism is now in place with the Google Video store, it just seems that selling music would be a natural step for them," Gary Price, the news editor of the Search Engine Watch, told Red Herring, the technology business news site.

There have also been rumours within the industry that Napster could become a takeover target. Earlier this month, Chris Gorog, the company's chief executive was forced to refute suggestions that the company was planning to lay off staff.

"Doubling our subscribers over the last 12 months [to 500,000] demonstrates the mass market potential of our music subscription model and the powerful appeal of Napster to music fans who want it all," he told the MP3.com website.

"With a track record of robust growth, exciting new developments in the pipeline and over $100 million on our balance sheet, we are extremely excited about the future of Napster."

Napster will report its third-quarter financial results on February 8. The company reported a loss of $13.6 million for the previous quarter on revenue of $23.4 million.

Unlike Apple's iTunes, where customers pay per downloaded track, Napster is banking on the conversion of the digital music market to a subscription model, where users pay a monthly fee for unlimited downloads. It currently trails the subscription market leader, RealNetworks, which has 1.3 million subscribers.

Analysts have noted that while an online music store would seem a natural fit with Google’s increasing range of sources, it would face a fierce battle from Apple, the company behind the iPod, which currently dominates the market.

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