YAHOO! and eBay are joining forces in a broad alliance aimed at thwarting the rapid expansion of Google, prompting speculation that a full merger of the two US internet giants is on the cards.

The agreement comes amid intense competition between Yahoo!, Google and Microsoft to raise their share of the online advertising market, and nervousness within eBay that Google is encroaching on its core business.

Scott Devitt, an analyst with Stifel Nicolaus, said: “Yahoo! and eBay fit together like a hand in a glove. This is just phase one of what I think will be a string of further tie-ups between Yahoo! and eBay.”

Shares in both companies rose on news of the alliance, in which Yahoo! will become the exclusive provider of display advertising on eBay’s website and will supply some search-generated advertising. In return, eBay will offer expertise as a payment provider, with its PayPal service becoming the preferred facilitator of purchases made on Yahoo!.

PayPal already has 73 million accounts in the US and, under the deal, the electronic payment system will be promoted to Yahoo!’s partners, including retailers and publishers.

The agreement brings together two of the most powerful companies on the internet. Yahoo! is the most visited site in the US and has the second-most popular search engine after Google in terms of queries. EBay, by far the largest online auction site, had about 56 million US visitors in March, ranking fifth behind Yahoo!, Microsoft, Google and TimeWarner’s AOL in terms of web traffic, according to NetRatings research.

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