BERLIN -- The battle to sell Europeans loads of

Princess Diana

memorabilia and

David Hasselhoff

CDs just got a lot hotter.

Faced with a growing threat from U.S. Internet auction giant

eBay

(EBAY) - Get Report

,

QXL

(QXLC)

of the U.K. and Germany's

Ricardo.de

announced their intention to join forces Tuesday. In a stock

swap that will amount to a $1 billion takeover of Ricardo by the smaller QXL, the combined company will have 1.3 million members and a market capitalization of around $1.6 billion.

The deal values Ricardo at a 27% premium to Monday's closing price, helping the company's shares on Frankfurt's

Neuer Markt

surge Tuesday 8.5% to 108.00 euros ($97.48). QXL fell 6.1% to 169 pence ($252.53) in London. The new company will be headquartered in London and will have listings there and on the

Nasdaq Stock Exchange

. As the market closed, QXL shares traded in the U.S. had fallen 1 3/8, or 9.6%, to 12 15/16.

Besides strengthening its position in the eBay European strongholds of Britain and Germany, QXLricardo, as the new company will be known, will be represented in 10 other countries throughout the rest of the Continent as well. For eBay, the deal will mean fiercer competition where it is already operating and could also make it more difficult for the company to expand into new European markets.

Despite eBay's size, a united QXLricardo will be a formidable European champion, according to some observers. "I think this is going to be a powerful combination," says Peter Misek, an analyst for

Chase H&Q

in London. "Now you've got one European champion fighting against eBay." Chase H&Q maintains a market in eBay shares.

While perhaps QXLricardo won't box in the U.S. giant on its own turf anytime soon, Misek stresses the particular country-specific demands of operating in Europe. "I think this pushes eBay to accelerate its European strategy,

but the problem is, it's not as easy as that. eBay currently has the ability to handle

only two languages."

Moreover, because of a dearth of targets, eBay might not be able to quickly expand its presence elsewhere in Europe by making a series of high-profile local-country acquisitions, as it did when it snapped up the Berlin-based

Alando

auction site and rapidly revamped it into its successful German operations.

That's not to say the new alliance means eBay's days this side of the Atlantic are numbered, however. In the U.K. and Germany, the region's two largest online markets, eBay's sites continue to outsell QXL and Ricardo by a wide margin and its European users total just under a million. That figure may be slightly padded as it includes Europeans registered on its U.S. site, but eBay remains a sizable player nonetheless. Investors certainly appeared sanguine about eBay's prospects Tuesday, as the shares closed up 5 5/8, or 4.3%, at 135 5/8.

Also eBay may decide to fine tune its focus to aid its expansion in Europe. There may not be a big pan-European acquisition eBay can make, however. "I imagine they could look to buy into" specific auction technology or could try to corner niche markets "to build reach into a country," says Sarah Skinner, Internet analyst for

Durlacher Research

.

That could help eBay go toe to toe with the combined QXLricardo outside of Germany and the U.K. And with the American auction site unlikely to simply cede the rest of Europe to QXLricardo, fans of black velvet

Elvis

posters and rare Beanie Babies the world over should be able to sleep a little easier.