updated 11/14/2006 8:27:15 AM ET 2006-11-14T13:27:15

Web search leader Google Inc. said on Tuesday that it closed its $1.65 billion acquisition of top online video-sharing site YouTube, setting a new record in the valuation for user-generated media sites.

In a statement, Mountain View, California-based Google said it had issued 3,217,560 shares to pay for YouTube. It also paid restricted stock units, options and a warrant that can be converted into 442,210 shares of Google’s common stock.

The $1.65 billion stock deal included around $15 million in funding which Google provided to YouTube between signing the deal in early October and closing the deal this month.

One-eighth of the equity, or roughly $200 million, will be held in escrow as security on certain unspecified indemnification obligations, the Google statement said.

YouTube has enjoyed explosive growth over the past year and in the process, pioneered a new grassroots online video star-making system, as Web viewers seek out short-form comic sketches created by other users. San Bruno, California-based YouTube says it serves up more than 100 million videos a day.

But its popularity has also been fueled by the widespread availability of copyrighted TV episodes and music videos for which media companies say they should be compensated.

Media industry sources in recent weeks have said that some portion of the price paid by Google would be reserved to settle potential copyright infringement suits aimed at YouTube.

Meanwhile, Google and YouTube have said they are racing to strike deals with video producers that would allow them to share in revenue when such programming appears on YouTube.

YouTube Co-founder and Chief Executive Chad Hurley said that Google’s backing will provide his company with the flexibility to continue to offer innovative services, but also emphasized that the company would remain independent.

“In the coming months, we will roll out many new exciting features and programs,” Hurley said. “The community will remain the most important part of YouTube and we are staying on the same course we set out on nearly one year ago.”

Speaking at a Stanford University conference on Saturday, Google Chief Executive Eric Schmidt was asked whether the YouTube deal was evidence of a new stock market bubble comparable to the late 1990s dot-com era.

Schmidt said he sees no replay as YouTube is the only one of the new generation of Internet sites to be acquired for more than $1 billion, and that none of the latest crop of sites have held the dramatic initial public offerings of the dot-com era.

“If there is a new bubble I don’t think a single acquisition is a talisman of that,” Schmidt told the audience of business school students. “Before you call it a bubble why don’t you look for a trend?”

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