The virtual card will function like a regular debit card and enable customers to shop online with the funds in their PayPal accounts at any e-merchant that accepts MasterCard cards.

The system, which is based on software developed by Dublin-based Orbiscom, generates single use account numbers and one-time card verification codes that are linked to customers' PayPal accounts.

To use the system a customer downloads an application that is added to the toolbar in a Web browser. When they want to use the virtual card, the application generates a pre-populated form for payment which includes the single-use MasterCard number and card verification code which is connected to their PayPal account.

The move is part of an initiative by PayPal to extend use if its payment system beyond its core Ebay markets. A PayPal spokesperson told reporters that the virtual card will enable customers to use their person-to-person payment accounts with merchants that don't currently accept its payment system.

The system will also generate additional revenue as PayPal will earn an interchange fee on every transaction made with the system.

According to press reports, the product is now being tested by PayPal employees and will be rolled out to the firm's 105 million accountholders by the end of the year.

The move follows news last week that Google was launching an e-payment service, called Google Checkout, which allows customers to make purchases from Internet retailers without having to repeatedly enter credit card details.