A contrite and repentant Google cancelled a party that angered eBay and that a source said led eBay to remove all of its ads from Google's US network earlier this week.

On Monday, Google announced it would throw a US party in Boston this evening designed to attract eBay merchants who would be in town to attend the eBay Live annual seller conference.

The purpose of the party was to protest eBay's decision to forbid merchants in its marketplace from using Google's Checkout online transaction system.

eBay found Google's move to be in bad taste and, at some point after the party was announced, eBay took the drastic measure of pulling all of its ads from Google's AdWords US network.

A source familiar with the situation said that the decision to turn off the ads had come from eBay's top executives who were steaming over what they perceived as a low blow by Google designed to embarrass eBay in front of its top merchants.

It would be hard to disagree with eBay executives' assessment, considering the mocking tone of Google's party announcement, encouraging eBay merchants to gather at the Old South Meeting House, where in 1773 mass protest meetings were held, leading to the Boston Tea Party.

"We'll use the same spot where revolutionaries launched the Boston Tea Party to celebrate freedom with free food, free drinks, free live music – even free massages," the official blog posting reads.

Then, yesterday afternoon, Google unexpectedly cancelled the party, after its officials apparently determined they had gone too far.

"eBay Live attendees have plenty of activities to keep them busy this week in Boston, and we did not want to detract from that activity. After speaking with officials at eBay, we at Google agreed that it was better for us not to feature this event during the eBay Live conference," reads a posting on that same blog.

eBay, which had earlier blasted Google for the planned party, said it was pleased with Google's decision. "It's reassuring to see that Google recognises that their actions were inappropriate. We're pleased that our partner chose to do the right thing and cancel their event," eBay said in a statement.

However, eBay is keeping its ads off AdWords, eBay spokesman Hani Durzy said. eBay Live begins today in Boston.

The spat is yet another sign of what many consider a significant deterioration of relations between the two Internet giants in recent years, as Google has become a partial competitor to eBay.

Earlier Wednesday, Durzy said the decision to pull out the ads wasn't related to the party and characterized it as an ordinary experiment by eBay, similar to others the company constantly does to determine the best allocation of its advertising and marketing budget.

But there is nothing ordinary about eBay and Google, and the pullout is likely to have significant repercussions for both companies while it lasts: eBay is the largest paid search advertiser in the US and Google is the country's largest paid search ad network.

In March, eBay ranked first in the US among paid search advertisers with 802 million sponsored link exposures, or 4.1% of the total, according to comScore Networks. That doesn't even take into account eBay's comparison shopping engine, Shopping.com, which ranked third on that list with 357 million sponsored link exposures, or 1.8% of the total.

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

At the centre of this week's confrontation is , introduced to the US about a year ago, in the UK earlier this year and so far banned from the eBay sites. eBay argues Checkout doesn't have enough of a track record yet, while Google charges eBay with trying to protect its own PayPal online payment system. In addition to Checkout, Google has been entering eBay territory with other products like its Base listings service.

In May of last year, eBay and Yahoo struck a wide-ranging partnership that, among other things, made Yahoo the exclusive provider of search and display ads within US eBay sites.

Although Google performs a similar function for eBay sites outside of the US, the eBay-Yahoo tie up was seen as a defensive move by eBay and Yahoo against Google.

Google hasn't replied to requests seeking comment.