Updates with closing stock price

Google's ( GOOG) solid earnings and stability claims failed to convince investors that Internet advertising has recovered.

Google shares closed down 2.8% to $430.25 Friday after the company posted better than expected profit on inline revenue. And while Google executives said big advertisers had returned to the table, it is doubtful they will stay there as consumers continue to stay on the sidelines.

The problem for the ad industry was evident in Google's conflicting results. Revenue from paid clicks, the money Google collects from ad placements was up 15% over year-ago levels, but revenue per click was down 13% in the same period.

The upshot: Consumers are clicking on Internet ads, but they aren't buying goods and services.

On an earnings conference call with analysts Thursday, Google chief Eric Schmidt said he was seeing signs that the advertising freefall may have stopped. "We are not now looking at the downward spiral that we were seeing six months ago," Schmidt said.

The advertisers that fled in droves several months ago have at least reappeared, said sales chief Nikesh Arora.

"Big advertisers seem to have come back to the table after watching and waiting for a while," Arora said.

The second-quarter performance signaled a return of slight growth after sales and profits slid sharply year when the economic crisis killed advertising spending.

For the second quarter, Google posted a profit of $5.36 a share, up from the $4.63 in the year-ago quarter and well above the $5.08 net income analysts were looking for, according to First Call.

Sales for the quarter ended last month, excluding $1.45 billion in so-called traffic acquisition costs or TAC, were $4.07 billion, up from the $3.9 billion level a year ago, and roughly in line with the $4.06 billion analysts were expecting.

Google saw two key improvements that helped pad second-quarter numbers. Sales from paid click ads jumped 15% from year-ago levels, though 2% down from the first quarter, while cost-per-click, a measure of how much Google pays its ad partners, declined 13%.

The collapse of ad spending has thrown Google into a slump, giving investors ample reason to think the stock isn't necessarily going up.

Meanwhile, rivals Yahoo! ( YHOO) and Microsoft ( MSFT) have tried to capitalize on the downturn by introducing new search services to challenge Google's dominance.

For its part, Google has responded this month with an Internet calling service called Google Voice and the announcement of Chrome, a browser-based computer operating system meant to thwart Microsoft's mobile device software effort.

Google also defended its YouTube video service. Critics have pointed out that the company spends an estimated $500 million a year on YouTube, without getting much in return. But company executives said advertising, such as pre-roll ads, were gaining traction and could soon pull the video business out of the red ink and into profits, Google executives said.

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