PayPal, the most popular online payment system, said Monday that millions of PayPal customers will be eligible to receive cash rebate offers of up to $20 when paying with PayPal Nov. 23 through May 15, 2007.

The unit of online marketplace eBay (EBAY) said it will pay up to $100 million in promotional incentives to customers who use the service on up to 100,000 merchant sites in North America.

The PayPal promotion follows speculation earlier this month that Google (GOOG) was preparing to offer its rival Checkout payment service to merchants free during the holiday season, in a move to grab market share.

Stifel Nicolaus said a free promotion move by Google could help the Web search leader wrest merchants and consumers away from PayPal during the crucial holiday season, which accounts for 35% to 40% of annual transactions.

More than 200 mid- to large-size merchants have signed up for Google Checkout, which is a payment processing service rather than a full consumer payments system like PayPal. Google Checkout typically charges 2% plus 20 cents in transaction fees.

Stifel Nicolaus analyst Scott Devitt said in a note to investors Monday that PayPal’s move is designed to increase the use of PayPal by merchants beyond eBay’s own marketplace, while preempting any move by Google to undercut it.

“Competitively, the PayPal promotion is a good move,” Devitt said.

Merchants involved include the sites of Barnes & Noble, Dell, Petsmart, Starbucks and Art.com and a portion of the Hewlett-Packard site, PayPal’s site said.

A free shipping promotion also begins Nov. 23. Devitt said he expects the shipping offer to expire by mid-December.

Posted: 11|20|06 at 2:12 pm. Filed under: Auction News.