ebay2.bmpEBay, in a surprisingly defensive move, has yanked all of its advertising from Google’s network (a story that has been widely covered).

The action came after Google planned a fun party — with free drinks, food and massages — to pitch its online payment service, Google Checkout in Boston during eBay’s user conference there.

This was a direct attack on eBay’s PayPal service, and surprisingly aggressive given Google chief executive Eric Schmidt’s insistence that Google Checkout wasn’t a competitor to PayPal. It also comes after years of tension between the two companies: Four years ago, Google emerged as a threat — luring merchants away from eBay to have them advertise their wares via Google’s Adwords.

Google abruptly canceled the party yesterday, but only after eBay had made the advertising decision. EBay will be using the money to spend for advertising on Microsoft and Yahoo. This is the sharpest break between eBay and Google yet, and it’s not likely to get better: Google is too much of a threat. Its rare to have such visible cold wars in the valley, the latest being Peoplesoft vs. Oracle.

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