Citing people familiar with the matter, the Wall Street Journal says the new service - dubbed Google Wallet - could be launched by the end of the year. Exact details of the service are not known, but the WSJ says the e-payments system could have similarities with PayPal, which allows consumers to pay for purchases by funding electronic-payment accounts from credit card accounts.

No details about the proposed service have been released by Google, but according to the New York Times, the chief executive of a major online merchant - who hasn't been named - has said that his company had been approached by Google to take part in the service. The payments service was also discussed at an analyst conference, according to the WSJ.

The payments system would be a chance for Google diversify its revenue beyond online advertising, which generated 99% of its $3.2bn in revenue last year. Internet-based person-to-person payment systems, such as PayPal and WorldPay, generate revenue by taking a commission on each transaction.

PayPal recently posted a 44% increase in the value of total payment transactions handled to $6.2 billion for the first quarter 2005.

Internet merchant Amazon is also said be mulling the adoption of its own payments operation to reduce bad debt expenses from credit card transactions.

Breaking Payopal's stranglehold on the market will not be easy. In October last year Yahoo! shut down PayDirect, the online person-to-person funds transfer service it operated in conjunction with HSBC, due to poor customer uptake. Both Citibank and Natwest have also shuttered P2P systems.