Google Inc unveiled a new advertising exchange that draws on its search prowess to challenge Yahoo Inc's grip on the market for online display ads.

The new DoubleClick Ad Exchange introduced on Friday is the first major overhaul of the system since Google acquired DoubleClick for more than $3 billion in March 2008.

It represents a key plank in Google's plan to supplement its market-leading business of serving text-based ads alongside Web search results with the more visual, graphical ads that appear on websites -- a market dominated by online rivals Yahoo and Time Warner Inc's AOL.

Yahoo's collection of websites served the largest number of display ad impressions in the United States, with a 12.5 percent share of the market in July, according to comScore. Google was in sixth place, with 2 percent share of ad impressions, although the figures do not include the display ads that the companies sell through ad networks or exchanges.

With the new exchange, Google will for the first time combine the DoubleClick exchange with its own advertising auction systems -- AdWords and AdSense -- significantly expanding the number of marketers and Web publishers that can use the exchange.

The way the DoubleClick exchange was set up previously, it just didn't have enough liquidity, said ThinkEquity analyst William Morrison.

He said the changes could make Google the dominant exchange for display advertising on the Internet, but noted that it would not happen overnight.

Ad exchanges play an increasingly important role by providing a forum for publishers to sell the unsold ad space on their websites to the highest bidders. The market has become more fragmented as Web users spend more time on social networks and blogs instead of relying on portals and other destination sites.

According to Google, more than 40 percent of online ad inventory often goes unsold because publishers don't have an efficient way to sell the slots.

We want to make display advertising as accessible and open as possible, like search advertising is today, Neil Mohan, vice president of product management at Google, said in an interview with Reuters.

Mohan said the new version of the DoubleClick exchange features tools that allow brand advertisers to more precisely target audiences and to monitor the results.

Yahoo operates the largest ad exchange through RightMedia, a business that Yahoo purchased for $650 million in 2007. Yahoo said it expected the market for online display ads to be fragmented and for there to be other ad exchanges.

We welcome these exchanges, and look forward to working with them and integrating with them for our partners, said Yahoo in a statement.

In July, Google Chief Executive Eric Schmidt said that display advertising is likely to be the next billion dollar business at Google.

Google generated nearly $22 billion in sales last year, virtually all of it from its paid search ad business, according to analysts.

On Nasdaq, Google closed Friday's trading session down 26 cents at $491.46, and Yahoo dropped 11 cents to $17.39.

(Reporting by Alexei Oreskovic; Editing Bernard Orr and Richard Chang)

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