Google has launched its Checkout online payments system in the UK, stepping up competition with eBay subsidiary, PayPal.

The search engine giant also intends to boost revenues for its AdWords advertising service by linking users' spending on AdWords to free transaction processing through the Checkout system.

The Checkout service, which is aimed at the small-to-medium sized business (SMB) market and individual sellers, was launched in the US in June last year. Google now claims it is used by "thousands of sellers and millions of buyers".

Google is aiming to woo users with free transaction processing for the remainder of 2007. From 1 January 2008, AdWords customers will be offered free Checkout processing on £10 of sales for every £1 spent on AdWords. But Checkout users who do not also use the AdWords service must pay 1.5% plus £0.15 per transaction.

But it faces still competition from PayPal, which processed £4.2 billion of online shopping payments in Europe last year. Figures from Forrester Research show PayPal is now a preferred payment method for 35% of online shoppers in the UK and 23% across Europe as a whole.

Last month, PayPal made its own pitch at the SME market, launching Website Payments Pro – its first non-hosted payment suite. This includes Express Checkout, Direct Payment application programming interfaces (APIs) and Virtual Terminal functions, allowing shoppers to choose how to pay for their purchases.