Now Google ( GOOG) is selling local ads, too.

Joining rival Yahoo! ( YHOO), Google is trying to offset declining sales growth by wooing local businesses. Yahoo! recently released its Yahoo! Local feature from beta testing. The MSN unit of Microsoft ( MSFT) has local search under development.

The Google local service marks the Mountain View, Calif., company's second try in less than a month to lure smaller companies. As many as three text links will be visible at the bottom of the screen of Google Local. People who click on the ads will be directed to a location on the adjacent map that's highlighted with digital push pins. These ads will also be found on the main Google site and on the Google network of affiliated Web sites.

This is the latest sign of the growing importance of local advertisers to Google. These companies will spend $1 billion on search this year, more than double over last year, according to research firm Borrell Associates. Keyword prices, which have remained fairly stable for larger businesses, are increasing for smaller companies, according to advertisers.

"There is pent-up demand for increased opportunities to buy local keywords," says Harrison Magun, vice president and managing director of aQuantive's ( AQNT) Avenue A/Razorfish. "That pent-up demand to link online behavior to offline sales must be contributing to a rise in local keyword prices."

Verizon's ( VZ) online directory agreed earlier this week to sell GoogleAdwords to its clients. This month, Google began offering a simplified version of its AdWords program aimed at small businesses.

Selling to local businesses is more difficult for search engines than selling to national ones. For one thing, there are lots of local businesses. The Small Business Administration estimates that there are 25 million businesses in the U.S., almost all of which employ fewer than 500 people. Then there's competition from sources like local newspapers and cable television.

Plus there is the added difficulty in reaching out to business owners who may have never advertised on the Internet and may not even have their own Web sites. Their lack of experience may be pushing them to overpay for keywords.

"There is some irrational bidding going on," says Rodney Rice, co-chief executive of InterActiveCorp's ( IACI) ServiceMagic business, which uses search engines to help match people with local contractors. ServiceMagic counts on vetted user reviews, in addition to keyword advertising, to help "brand" local businesses, he says.

Investors look at keyword prices as an indication of how Google, which provides little information or earnings guidance, is performing. This is a metric that garners added interest, since Google's shares are down 6.3% this year.

Keyword prices don't tell the whole story. Advertisers have found that it isn't always beneficial or cost effective to be highlighted as the first advertisement on a Google search.

"There are people who are bidding more wisely," says Chuck Richard, vice president and lead analyst with Outsell, an information-content research firm.

All of the engines have talked a good game about local search.

"The search engines haven't cracked the code to make it really easy for consumers to find local services and local products," Magun says. "The local search product is where the national search product was three or four years ago."

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