The acquisition of the world’s biggest web video company catapults Google ahead of rivals such as Microsoft, Yahoo! and MySpace in the scramble to secure the largest share of what analysts have dubbed the “new frontier” of the internet.

But Eric Schmidt, Google’s chief executive, said that the acquisition was only the start as he looks to build on his fledgeling Google Video business. “Most people believe this is just the beginning of the internet video revolution. YouTube is one of many investments we will be making,” he said.

He described YouTube as the “next step” in his push for internet video domination, adding that he would retain Google Video and integrate it with future purchases.

YouTube was founded in February last year as a site dedicated to home video clips uploaded by its users. It has since added music videos and television excerpts to its offering and serves up about 100 million clip viewings a day to its 34 million users.

The deal, which still needs approval from both companies’ shareholders, came within hours of YouTube reaching an agreement with Universal Music to broadcast its music videos, which had threatened to sue for copyright infringement, and Sony BMG.

Meanwhile, Google underlined its own interest in video by signing similar agreements with Warner Music and Sony BMG to distribute music videos.

YouTube has been fighting to avoid a series of copyright infringement lawsuits from broadcasters and music groups unhappy that video content was being uploaded on to its website without the owners’ permission.

However, Universal’s decision to sign up leaves only one music major, Britain’s EMI, without an agreement with either site. Warner signed up with YouTube last month.

Google’s acquisition of YouTube would hand paper profits of hundreds of millions of dollars to the internet upstart’s three founders, all former employees of PayPal, eBay’s electronic payment unit.

Of the founders, Chad Hurley is chief executive, Steve Chen is chief technology officer and Jawed Karim has left the company to study at Stanford University.

Under the proposed agreement, YouTube would retain its brand and operate independently from Google.

Mr Hurley said: “By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners.”

The deal also puts Sequoia Capital, the Silicon Valley venture capital firm, on course for a massive return on its $11.5 million investment. Sequoia’s previous investments include Google and Yahoo!

Times Recommends

• Brown targets fat cats after nationalising banks
• US shares soar on global banking rescue
• Europe follows Brown to head off meltdown