updated 4/20/2006 2:55:38 PM ET 2006-04-20T18:55:38

U.S. online advertising revenues grew for a third consecutive year as keyword ads targeted to specific search queries continued to dominate, an industry group said Thursday.

Online advertising set a new record of $12.5 billion last year, a 30 percent increase from the previous high of $9.63 billion in 2004, the Interactive Advertising Bureau said.

Search remained the largest generator of revenues, accounting for $5.1 billion, or 41 percent, of the 2005 figures. That’s slightly higher than the 39 percent share in 2004.

Internet ads also set a record for the fourth quarter, with revenues totaling $3.6 billion, a 34 percent jump from the same period in 2004 and 15 percent more than the previous record of $3.1 billion, set in the third quarter of 2005.

“Interactive advertising continues to experience tremendous growth as marketers experience its overall effectiveness in building brands and delivering online and offline sales,” Greg Stuart, chief executive of the IAB, said in a statement.

Stuart said he expects growth to continue as advertisers find additional ways to exploit opportunities in broadband video, Internet-based television and online games.

The growth in online ad opportunities was one of the chief reasons Time Warner Inc.’s AOL unit opted to make most of its features available for free through its ad-supported sites, rather than keep it exclusive to its paying Internet access subscribers.

Despite the record revenues, Internet advertising represents only 5 percent of all U.S. advertising revenues, up slightly from the 4 percent share in 2004, PricewaterhouseCoopers LLP said in the study it conducted for IAB.

Nonetheless, in a report released earlier this month, Merrill Lynch media analyst Lauren Rich Fine estimated spending on Internet ads this year will increase 27 percent, surpassing magazines and the Yellow Pages — both more established media markets.

Search has been the big driver in online advertising in recent years. It accounts for virtually all the revenues at search engine leader Google Inc., which helped pioneer the format in which text ads are displayed alongside regular search results, customized to the subject on which a user is searching.

Banner and other display ads made up the second-largest category, accounting for 21 percent of 2005 revenues. Online classified followed at 17 percent.

Consumer-related ads, such as those for drug stores, toys, retail stores, travel services and cars, accounted for half of last year’s revenues. Financial services and computing made up about 12 percent each, and telecommunications companies accounted for 7 percent.

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