News of the service - called PayPal Mobile - leaked out when bloggers found links to test pages on PayPal's Web site. Rumours that the firm was gearing up to launch a m-payments service surfaced in February when PayPal started recruiting business and product staff for a mobile payments 'start-up' unit.

The eBay subsidiary has now confirmed that its m-payments service will be launched in the next couple of weeks in the US, Canada and the UK. PayPal spokeswoman Sara Bettencourt told reporters the firm currently has no specific plans to extend the service to the other 55+ countries where PayPal operates.

The new service will enable registered users to use their Web-enabled phones to make person-to-person fund transfers or pay for purchases. Customers can make payments using a text message service or by calling an automated customer service system and using voice commands to transfer funds.

The 'Text to Buy' service will also feature a facility for customers to purchase advertised items by sending a text message containing a product code located in the ad. Customers then receive an automated call asking them to confirm the order and to enter their mobile PIN. Users are then asked to confirm the delivery address. Purchases will be debited to PayPal accounts.

In December, US start-up firm TextPayMe launched a beta trial of a similar SMS text payment system. But analysts believe that PayPal is well-positioned to dominate this market as it will appeal to the firm's huge base of existing users. PayPal currently has over 100 million accounts worldwide.

Separately, research released by PayPal and Datamonitor shows that spending on downloads from the Internet in the UK will reach £1.7 billion in next five years.

Spending on Internet and mobile phone downloads and online gaming could account for as much as 10% of all online retail spending in the UK by 2010, says PayPal.

The biggest growth areas for digital downloads are the mobile and music industries, which will account for 89% of all consumer spending on digital content.

Spending on online music downloads is expected to grow ten-fold to £379 million by 2010 as legal download sites such as iTunes gain greater traction. The market in the UK was worth £35 million in 2005.

According to the research, mobile services including music, movie clips and TC channels will create a market for digital content worth £1.14 billion by 2010. The market will grow three-fold from £380 million in 2005 as the rise of 3G mobile spurs consumer spending.

Carl-Olav Scheible, general manager, UK merchant services for PayPal Europe, says: "As new wave services such as wirelessly-delivered music files, movie clips and mobile TV are delivered to handsets, the levels of spend are likely to be spurred once again.

"The challenge will be in creating payment mechanism that means businesses can monetise their content without being entirely beholden to the mobile networks."