Beijing ? Yahoo Inc. announced Thursday it would pay $1 billion in cash for a 40 percent stake in the Chinese e-commerce firm Alibaba.com, heating up the race to dominate China’s fledgling online auctions industry.

The alliance is the biggest deal yet in a flurry of recent investments in China by foreign Internet companies eager for a share of a market with more than 100 million people online.

Alibaba runs Chinese- and English-language auction sites for foreign companies looking for Chinese wholesale suppliers and individual Chinese buyers and sellers.

Yahoo also will merge its China-based subsidiaries into Alibaba, the two companies said. The combined entity will include 3721.com, a Chinese-language search engine that Yahoo acquired last year.

The deal represents a challenge to auction powerhouse eBay, which in 2003 bought a Chinese portal, eachnet.com.

Jack Ma, left, chief executive officer and founder of Alibaba.com, and Daniel Rosensweig, Yahoo chief operating officer, announced Thursday that Yahoo would pay billion to acquire a 40 percent stake in the Chinese e-commerce firm Alibaba.com. The agreement makes Yahoo the largest strategic investor in Alibaba.

“This is really probably the knockout blow for eBay in China,” said Porter Erisman, Alibaba’s vice president for international relations.

Erisman said the deal made Yahoo and its local partners such as Alibaba the dominant players in online auctions in China, Japan, Taiwan and Hong Kong.

“This is going to make it hard for eBay to win in Asia,” he said. “It totally reshapes the landscape for auctions in Asia.”

San Jose, Calif.-based eBay rejected suggestions that the Yahoo-Alibaba tie-up was a threat.

“We will maintain our leading position in China,” said Liu Wei, a spokeswoman in Shanghai for eBay eachnet.

Yahoo will have 35 percent of voting rights in Alibaba as a result of the investment, in a deal expected to be completed in the fourth quarter of this year, the two companies said.

“This is Yahoo getting much bigger in China,” Daniel Rosensweig, chief operating officer of Yahoo, said at a news conference with Alibaba’s founder, Jack Ma. “We look at this as an opportunity to get much bigger much faster working with a great management team.”

Rosensweig said the deal created an entity with assets to compete across the full range of Internet businesses in China – search engines, e-mail and online commerce.

Yahoo expects China to be the world’s biggest Internet market within five years, he said.

According to Erisman, Alibaba had $68 million in revenue last year.