Chinese e-commerce operator Alibaba.com is in the late stages of talks to sell a 35 percent stake to Yahoo Inc. in return for $1 billion and Yahoo's entire China operations, a source close to the discussions said on Wednesday.

The deal is in the final hours of discussions, the source told Reuters, speaking on condition of anonymity.

The combination would create an e-commerce giant by bringing together Alibaba's business-to-business and consumer online auction sites with Yahoo's search operations, China's second largest after leader Baidu.com.
A spokesman from Alibaba and a spokeswoman from Yahoo both had no comment.

A deal would mark an end to Yahoo operating a venture in China on its own, swapping its country operations in exchange for a structure more similar to Yahoo Japan Corp., in which the U.S. search giant holds a 33 percent stake while Japan's Softbank holds a controlling 42 percent.

Softbank is also an investor in Alibaba, and is said to have been a broker in the current China talks, according to previous media reports.

Based in the eastern China city of Hangzhou -- about two hours from Shanghai -- Alibaba's main China operations include a business-to-business e-commerce site; an online auction site called Taobao that competes with eBay in China; and a recently launched online payment system called Alipay.

Yahoo's main China business consists of its search service, which it got two years ago when it purchased popular local search site 3721.com for $120 million.

The pairing would combine Alibaba's 2,000-plus employees with Yahoo's, which number in the hundreds.

Yahoo's handover of its China operations to a locally based company would mark a shift in recent investment patterns by global Internet giants, which have spent the past three years snapping up homegrown Chinese industry leaders.

EBay entered China though a $180 million purchase of Shanghai-based EachNet. Expedia owner InterActiveCorp has paid $168 million for 52 percent of Chinese online travel agent eLong.

Online retailer Amazon.com purchased local player Joyo.com for $75 million, and online job search leader Monster.com bought a 40 percent stake in ChinaHR.com for $50 million.

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