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Citysearch, an online guide service about local US businesses, has partnered with MerchantCircle, in an effort to hold their own in the increasingly competitive area of local reviews.

The move comes as Citysearch is under attack from newer, fresher sites like Yelp, which offers reviews about locales and is appearing as high, if not higher than Citysearch in search engine results.

Citysearch, a division of IAC, has a large collection of local data that includes 14.5 million business listings, more than 600,000 user reviews, and ratings on more than two million business locations in the US. It has been growing through acquisitions, having purchased local review site Insider Pages earlier this year (our coverage).

MerchantCircle, which has already received funding from Citysearch, has been growing fast. It launched in June of 2006 with 5,000 merchants using its services — today it has 300,000. The Los Altos, California company lets businesses create a homepage with basic business information (including photos and videos), create online coupons, send email newsletters to customers and more. The company tells us its most successful feature is its reputation manager, a tool that automatically aggregates reviews and directory listings about a company from around the web.

The partnership will allow MerchantCircle to aggregate Citysearch data, and take advantage of Citysearch’s local ad network. Citysearch will use MerchantCircle’s software.

Of course, these companies are competing against many other also trying to provide local information more efficiently.

Google, Yahoo, Microsoft and AOL are all working on local search offerings. Google, for example, has both local search and local mapping services that many find useful. Then there are startups like local-review site Yelp and local search engine Grayboxx. Then, there are companies like accounting software company Intuit, which are trying to buy their way into local business. Earlier this week, Intuit purchased business web services company Homestead.

The Citysearch-MerchantCircle partnership will run deep. MerchantCircle will offer Citysearch marketing programs to its members, MerchantCircle will use Citysearch’s local and national ad-sales teams to help sell ads on its site to advertisers, and IAC will get a seat on MerchantCircle’s board.

Besides Citysearch, MerchantCircle has also taken on funding from Rustic Canyon Partners, Scale Venture Partners and Disney’s Steamboat Ventures.

Online advertising remains hot. But with Google, Microsoft and Yahoo fighting to serve advertising to large companies and publishers, smaller business clients are left neglected.

MerchantCircle, a controversial Silicon Valley company helping thousands of small businesses market themselves online, has raised $10 million in financing to pursue these small businesses further.

It has also arranged a credit line with Square 1 Bank to acquire other rivals in the sector.

The Los Altos, Calif. company has been accused of aggressive tactics. First, it lures small businesses to sign up as customers by creating profile pages for them MerchantCircle encourages the companies to “claim” these pages, by registering at the site.

Next, if the businesses don’t sign up at MerchantCircle, the company cold-calls them. MerchantCircle does offer a real service: It helps small businesses create a more robust online presence for a fee, ranging from $29 to $99 monthly, for example tracking reviews written about them at major review sites and other business listing portals. MerchantCircle alerts them when someone leaves a review about them. Merchant circle also offers them ways to advertise online with search engines (it helps them band together to get better deals too, for example, rounding up landscaping companies and working with them to create ads more cheaply at sites like Webvisible, using economies of scale). Finally, if a small business creates an online coupon on their MerchantCircle profile page, MerchantCiircle publishes that action on the pages of other local companies (see example of this in screenshot below of a profile page). This creates peer pressure, so that other companies see the actions of their peers, and are encouraged to do the same.

The strategy has worked. It has 250,000 small business customers, after 16 months of work. The latest investment is an endorsement too: Investors include Rustic Canyon, Scale Venture Partners and Disney. IAC was a new investor, which Smith said he welcomed for its expertise at doing acquisition deals. It raised $4.2 million two years ago (see our coverage).

Ben Smith, who founded Merchant, has returned as chief executive. He had previously left to become chairman, but returned to the helm this month after the company declined an offer to be acquired. Smith decided to embark on an acquisition strategy, instead. He declined to say how much the credit line is for.

One major rival is ReachLocal, which is hiring a massive salesforce to do something similar: Sell online marketing services to small business, including ads beside Google and Yahoo search results, and tools to maximize search engine optimization tricks. That company recently raised $52 million in venture backing to continue to add to its 300 person work force, and may even try to hire as many as 10,000 — all in an effort to compete with YellowPages. Reactions to our story about ReachLocal were almost universally negative (see comments; people thought it was crazy to be hiring so aggressively). The bile may reflect a bias among our Silicon Valley readers in favor of technology. MerchantCircle is a technology company — it has almost no salesforce. It has 10 employees (the marketing calls it makes are outsourced).

Another competitor is Weblistic, which is somewhere between ReachLocal and MerchantCircle on the automation scale. It has a salesforce, but not as big as ReachLocal’s. Weblistic, a two-year-old Fremont Calif. company led by the former chief technology officer of YellowPages.com, is backed by venture capital firm Foundation Capital. It has a low profile; we haven’t mentioned them before.

The latest Silicon Valley round-up:

Correlation between bomb building and entrepreneurship? — Former PayPal chief executive Peter Thiel reportedly says four of six founders of the online payment service built bombs while in high school. Meanwhile, Silicon Valley venture capitalist Steve Jurvetson designs rockets.

MyYearbook.com, a social networking site for teens, raises $4.1M – The site looks like a Facebook knock-off. It raised the first round of finance from U.S. Venture Partners (USVP) and First Round Capital. The site, hq’d in New Hope, Penn., is nothing to sneeze at: It boasts 1.7 million members globally, and over 5 million unique visitors per month. It prides itself in shunning banner ads of the kind that run on Facebook, saying teens like more interactive, social ads.

Don’t incorporate in Delaware — We know that’s what they all tell you to do, because of Delaware’s business-friendly laws. But a U.C. Berkeley study shows that an entrepreneur who incorporates in California may make $1.75M more in the event a sale triggers a preference clause, or otherwise leads to a showdown with an investing VC. The threat of a suit in your home state is enough to make the VC back off. Via Paul Kedrosky. Valleywag mentions it too.

SIPphone latest company to launch a new browser based calling service — as it tries to answer rivals such as Jajah, Jaxtr, Wengo. The company’s chief exec Michael Robertson told VentureBeat yesterday that “the call is made via the browser, like Skype, but unlike Skype there’s no big software download/install and registration period. You can walk up to any computer and call any phone number in the world. No mobile or landline is required to play.” More details here.

Latest on Google’s social application — Google’s Niniane Wang (left) is currently leading a team of Googlers to develop a new product in the social application space. Via Blogoscoped.

Google puts Wikipedia definitions at top of search results — Details via Rubel. This is the latest sign of continued momentum for Wikipedia, and comes as founder Jimmy Wales rolls out a Google competitor. Oh, and then there’s Amazon.com’s Wikipedia-clone for products, Amapedia. Confused yet? If not, read on…

Proliferation of Web site review and rating sites — Here’s a summary by Gigaom of the growing number of competitors to Amazon.com’s existing review service. There’s PowerReviews, a Millbrae, Calif. company that raised $6.25 million last year from Menlo Ventures and Draper Richards, and which is a Web-based portal for consumer reviews of products. There’s new player Ratepoint. Not mentioned is MerchantCircle, which lets businesses being reviewed keep up with these proliferating ratings.

Ironkey, a Los Altos, Calif. file encryption company, raises around $2.6M – The funding, apparently part of a larger second round of capital, is led by Leapfrog Ventures, reports Alarmclock.

Amie Street, the company that sells DRM-free MP3s at prices dependent on their popularity — It is looking to raise a first round of capital, reports Techcrunch.

We’re not raising VC! Well, maybe we are.. — CastTV, a video search engine company, which told us in Oct. it was not looking for cash, is reportedly about to close a first round of capital,.

TechStars is a new startup fund/incubator like YCombinator — It gives 10 start-ups a summer camp in Boulder, Colo. and $15,000 in seed funding. TechStars will take 5 percent of the equity in each startup. More at Techcrunch.

News Corp. to invest in ROO — The media giant will invest $12 million for a ten percent stake in the New York online video technology provider, according to the WSJ.

Global warming alert — Six years ago, scientists predicted global temperatures would rise at least 1.4 degrees by 2100. Now, they expect at least 2 degrees. Sea levels will rise between 28 and 43 centimeters. Time to wake up. And it’s not going to be easy.

Mozeen, the stealth mobile web portal — The company, mentioned by AlarmClock, is funded by big-name venture firm Sequoia Capital and the company reportedly claims “top talent from YouTube, Yahoo, Nokia, and Facebook.”

Mobile payment service Obopay has acquired social payment service, Billmonk — Details here.

Pickspal creates popular culture betting site — We covered Pickspal, which raised $6 million for a site where sports fans can bet on event outcomes. Now it has launched Pickspop, which lets you predict, say who will be on this week’s cover of people.

MySQL, the open source database company, is in talks with bankers about going public — Details here, but question is, will Oracle kill it first?