'Today, only one-third of internet users on the mainland shop online. We believe that by continuing to offer Taobao's services for free, we can accelerate the spread of e-commerce and market growth,' said Taobao president Jonathan Lu.

Globally, 86 per cent of internet users have tried online shopping, according to a Nielsen survey this year.

Taobao has been growing rapidly since it was founded in 2003, thanks in part to chairman Jack Ma Yun's 'no-charge' policy. Mr Ma has indicated earlier that despite its free service, advertising income helped Taobao break even in August.

'This allows Taobao to topple eBay as China's largest online auction market,' said Jacky Huang, a senior analyst at IDC China's digital marketplace research.

Taobao's transactions jumped 156 per cent last year to 43.3 billion yuan, making it the mainland's second-largest retailer after Shanghai-based Bailian Group, according to the Ministry of Commerce.

Newcomers are using the same approach. Tencent Holdings, which operates the country's largest instant messaging platform 'QQ', launched its free online auction site, Paipai, in 2005. Baidu.com, the country's top search engine, has also joined the fray lately by soft-launching its online auction site and plans to roll out an online payment solution soon.

'[Alibaba's] investment could help Taobao strengthen its No1 position and fend off competition from Baidu and others,' said Dick Wei, a China internet analyst at JP Morgan.

Referring to Baidu's online auction site, Mr Wei said: 'Even if the service were free, Baidu can benefit from the increase in page views and keyword search advertisements.'

Morgan Stanley analyst Richard Ji said Alibaba needed Taobao to remain strong as the auction site was a key link to the group's other businesses.

The fresh funding would probably be used to boost Taobao's platform and online auction market. 'Taobao users will use Alipay for payment and Taobao sellers will source their products on Alibaba.com, the business-to-business site,' Mr Ji said.

Taobao has 76 per cent of the mainland online shopping market, followed by Paipai's 9 per cent and 8 per cent for Eachnet, formerly eBay China, according to mainland researcher iResearch.

'Among all of Alibaba's assets, Taobao is the most valuable,' said Mr Huang. 'It has a great impact on how people use the internet in China.'

Analysts said investors who had hoped Alibaba might inject the auction site into Hong Kong-listed Alibaba.com might be disappointed.

'They would get more from a separate Taobao listing,' said an analyst.

Shares of Alibaba.com closed at HK$5.65 yesterday. They have lost 79.6 per cent this year.