In a marriage of games and social networks, SmallWorlds has teamed up with social network Hi5 to open up SmallWorlds’ cartoon-like virtual world to Hi5’s 60 million monthly visitors.

Hi5’s users can use Hi5’s games channel to access the browser-based virtual environment of SmallWorlds, which has hundreds of casual games available to play. Hi5’s games channel has become a major focus for revenue generation for the San Francisco-based social network.

With the alliance in place, users can pay for items in the virtual world using Hi5’s virtual currency, Hi5 coins, said Ted Tagami, vice president of business development for Small Worlds. The deal is good for SmallWorlds because it broadens its potential audience — Hi5 is a top 20 web destination with huge followings in Latin America and Europe.

SmallWorlds users can build cartoon-like avatars, or virtual characters. Then they can play games casually or go on quests, or even create their own adventures for others to enjoy. So far, users have created thousands of their own quests.

In that way, SmallWorlds is very Web 2.0-like. The game play is social, and users can import any web-based assets they want, such as YouTube videos. Users can play Pictionary-like games, decorate a virtual space, create their own pets or hang out in hot tubs. So the Hi5 alliance makes sense.

SmallWorlds targets people ages 13 and up. Much like a massively multiplayer online game, or a persistent virtual world, the world has built-in incentives to keep users coming back. The more you participate, the more access you get to virtual items.

Auckland, N.Z.-based SmallWorlds has brought in 650,000 registered users since launching in December. About 65 percent of them are women. Half are ages 13 to 18, and about 30 percent are 19 to 35. SmallWorlds has lots of competition, including huge virtual worlds such as Habbo and smaller ones such as Gaia Online. But SmallWorlds views itself as more web savvy, since it can easily import anything created on the web.

SmallWorlds started as a web app outsourcing company in 2005. Then it started working on its virtual world business in 2007. Now the company has 40 employees and more than 70 volunteers who are paid in virtual currency. The company has raised $2.5 million to date. It makes money through virtual goods sales, offer-based transactions and subscriptions.

Hi5 and SmallWorlds use OpenSocial to integrate their infrastructure. The SmallWorlds virtual world will be integrated into the Hi5 applications programming interface, or API. The two companies can share revenue related to virtual goods transactions. SmallWorlds is also connected to other social networks such as Facebook, Bebo and MySpace.