Portal supplier Yahoo is believed to be negotiating a potential alliance or possible purchase of eBay, the largest provider of auction websites.

The move follows America Online's proposed purchase of Time Warner for $165bn (£105bn), which is thought to have put pressure on Yahoo to cement its position as a leader in either the internet content or ecommerce markets.

According to US reports, the two companies are discussing a partnership deal, which could lead to a purchase, although the talks could be derailed if eBay demands a premium over its current market capitalisation of about $27bn.

The two are believed to have held preliminary talks last week that subsequently collapsed, but sources said there is a 50-50 chance of a "deep partnership" being formed.

Although Yahoo has its own online auction site, it is small in comparison with eBay's, and a merger with the company would immediately make Yahoo number one in the sector and in the more general ecommerce market. Such a transaction would also dramatically increase eBay's current attempts at international expansion, while boosting its domestic presence.

The rumours have led to frenzied trading in eBay's stock over the last two days. The company's share price closed yesterday at $211 - a rise of $1.25. But Yahoo's share price plummeted by $7.06 to close at $168.75.