The US company will now hold a 40% stake - and 35% of the votes - in the Chinese firm, which runs the country's biggest auction and trading sites.

The investment positions Yahoo to compete with world auction leader eBay in a key market.

Chinese internet firms are in demand after the rip-roaring flotation of search engine Baidu.com a week ago.

The firm's shares have more than tripled in value since the start of trading, to more than $90 a share.

Auction rivalry

Yahoo is to merge its Chinese search engine operations with Alibaba.

The Chinese firm, in which Yahoo is now the biggest single investor - as well as the biggest investor in the sector in China to date - employs some 2,000 people in the eastern city of Hangzhou.

It is best known for its online auction site Taobao.com, as well as flagship trading site Alibaba.com which helps small and medium-sized companies find customers at home and abroad.

Its business model puts it in direct competition with eBay.

Yahoo already leads eBay in Japan via its relationship with Softbank.

Softbank - one of Japan's pioneer internet start-ups, and now a success despite finding itself in dire financial straits after the dot-com collapse in 2001 - is thought to have helped broker the Alibaba.com deal.

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But Alibaba.com is also competing in the field of online payments, an area in which eBay has a huge stake thanks to its ownership of US payment broker Paypal.

Online surge

The Chinese government last month reported that the number of people in the country using the internet had reached 103 million, putting it second only to the US.

Leading overseas companies have recently been investing heavily in China's booming online market.

EBay paid $180m for Shanghai-based Eachnet and US web firm Interactivecorp - which owns Expedia - paid $168m for a majority stake in Chinese online retailer Elong.

And online book retailer Amazon bought Chinese rival Joyo for $75m.