updated 3/8/2006 7:26:14 PM ET 2006-03-09T00:26:14

Google Inc. has agreed to pay up to $90 million to settle a lawsuit alleging the online search engine leader overcharged thousands of advertisers who paid for bogus sales referrals generated through a ruse known as “click fraud.”

The proposed settlement, announced by the company Wednesday, would apply to all advertisers in Google’s network during the past four years. Any Web site showing improper charges dating back to 2002 will be eligible for an account credit that could be used toward future ads distributed by Google.

The total value of the credits available to advertisers will be lower than $90 million because part of that amount will be used to cover the fees of lawyers who filed the case last year in Arkansas state court. The proposed settlement still requires final court approval.

The lawsuit, filed by Lane’s Gifts and Collectibles on behalf of all Google advertisers, revolves around one of the most sensitive subjects facing Google and Yahoo Inc., which runs the Internet’s second largest marketing network.

Yahoo, which is also named in the suit, said Wednesday that it intends to fight the lawsuit’s allegations.

Mountain View, Calif.-based Google makes virtually all of its money from text-based advertising links that trigger commissions each time they are clicked on. Besides enriching Google, the system has been a boon for advertisers, whose sales have been boosted by an increased traffic from prospective buyers.

But sometimes mischief makers and scam artists repeatedly click on specific advertising links even though they have no intentions of buying anything. The motives for the malicious activity known as click fraud vary widely, but the net effect is the same: advertisers end up paying for fruitless Web traffic.

The lawsuit alleged Google had conspired with its advertising partners to conceal the magnitude of click fraud to avoid making refunds.

The frequency of click fraud hasn’t been quantified, causing some stock market analysts to worry Google’s profits will falter if it turns out to be a huge problem.

Google executives have repeatedly said the level of click fraud on its ad network is minuscule — a contention that the proposed settlement amount seems to support.

The $90 million translates into less than 1 percent of Google’s $11.2 billion in revenue during the past four years.

Google disclosed the settlement after the stock market closed. The company’s shares fell $10.57 to close at $353.88 on the Nasdaq Stock Market, then shed another $2.11 in extended trading.

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