Update: eBay pulls ads from Google ad network

eBay has pulled all of its paid search ads from Google's AdWords network in the U.S., an eyebrow-raising move likely to be interpreted in the industry as a sign of deteriorating relations between the two Internet giants.

However, eBay has kept its AdWords campaigns outside of the U.S., eBay spokesman Hani Durzy said Wednesday.

Durzy characterized the decision to pull the U.S. Google ads as an instance in a continued experiment eBay does to determine the best allocation of its advertising and marketing budget.

However, a source familiar with the situation said the move is an angry reaction by eBay's management to Google's decision to hold a protest party concurrent with the start of eBay Live, the company's annual conference for merchants. Google has been reaching out to media to promote the party, aimed at eBay merchants who are upset that eBay doesn't allow them to use Google's Checkout online transaction system. eBay Live begins Thursday evening in Boston, which is the time and place Google has chosen for its protest party.

This person also said the situation is fast-developing and fluid, with high-ranking eBay executives holding meetings right now to discuss the extent of the decision.

EBay has said that Checkout, introduced about a year ago, doesn't have enough of a track record yet, while Google argues that eBay is just trying to protect its own PayPal online payment system.

Durzy said the decision to "reallocate" the Google ad budget elsewhere isn't tied to the Checkout protest party, but he acknowledged that the Google event hasn't gone down well inside of eBay.

"This is a regular thing we do across the different channels we use for marketing, but, having said that, we are disappointed that Google has chosen this time to detract from our annual event that gives online sellers a chance to learn how to grow their business in eBay and in other channels," Durzy said. "It's not the kind of activity one partner normally does with another."

The pullout breaks the link between the largest paid search advertiser in the U.S. and the country's largest paid search ad network, and will likely create a situation that hurts both companies.

In March, eBay ranked first in the U.S. among paid search advertisers with 802 million sponsored link exposures, or 4.1 percent of the total, according to comScore Networks Inc. EBay's pull is even bigger if one factors in its comparison shopping engine Shopping.com, which ranked third on that list with 357 million sponsored link exposures, or 1.8 percent of the total.

Meanwhile, Google topped the list of search engine referrers, handling 57.3 percent of all paid search ad clickthroughs, comScore said. Yahoo Inc. took a distant second place with 26.1 percent of clickthroughs.

In other words, this situation likely creates a significant hole in paid search referrals for eBay and in paid search ads for Google in the U.S.

Relations between eBay and Google have been strained in recent years, as Google has morphed from a partner into a partial competitor with new products like Checkout and its Google Base listings service.