Yahoo Inc. (YHOO) is close to paying $1 billion and forking over its China operations for a 35 percent stake of China's second-largest e-commerce operator, Alibaba.com (search), a source close to the discussions said on Wednesday.

The deal is in the final hours of discussions, the source told Reuters, speaking on condition of anonymity. Members of the Chinese media have been invited by Alibaba to a news briefing set for Thursday in Beijing, according to one reporter.

The combination would create an e-commerce giant by bringing together Alibaba's business-to-business and consumer online auction sites with Yahoo's search operations, China's second largest after leader Baidu.com (BIDU).

Yahoo's shares have risen 1.6 percent this week since the news first emerged, compared with a small drop for the broader tech-heavy Nasdaq Baidu shares quadrupled in their U.S. debut on Friday, but fell 17 percent on Tuesday.

A spokesman from Alibaba and a spokeswoman from Yahoo both had no comment.

Yahoo would swap its country operations in exchange for a structure more similar to Yahoo Japan Corp., in which the U.S. search giant holds a 33 percent stake while Japan's Softbank holds a controlling 42 percent.

Softbank is also an investor in Alibaba, and is said to have been a broker in the current China talks, according to previous media reports.

An analyst at a major western brokerage, speaking on condition of anonymity, said Yahoo's ultimate aim may be to buy all of Alibaba -- an option that has been mentioned as part of an overall deal in the Chinese media.

"It's unclear if Yahoo's comfortable owning one-third forever, or whether Yahoo has a path to control," said an analyst at a major western brokerage, speaking on condition of anonymity.

Citing Yahoo Japan as a precedent for the move, the analyst said Yahoo was positioning itself to take a dominant role in China.

Based in the eastern China city of Hangzhou -- about two hours from Shanghai -- Alibaba's main China operations include a business-to-business e-commerce site, an online auction site called TaoBao that competes with eBay (EBAY) in China, and a recently launched online payment system called Alipay.

Yahoo's main China business consists of its search service, which it got two years ago when it purchased popular local search site 3721.com for $120 million.

The pairing would combine Alibaba's 2,000-plus employees with Yahoo's, which number in the hundreds.

The new entity would have a notional value of about $3 billion, but little cash is expected to be involved. Yahoo does not provide financials for its China operations, and privately held Alibaba only provides selective operating information.

Last month, Alibaba said transaction volume at its TaoBao service -- which does not charge transaction fees -- hit $200 million in the second quarter, with 8.5 million product listings and 7.2 million registered users at the end of the period.

Yahoo handing over its China operations to a local company would mark a shift in recent investment patterns by global Internet giants, which have spent the past three years snapping up homegrown Chinese industry leaders.

EBay entered China though a $180 million purchase of Shanghai-based EachNet. InterActiveCorp (IACI) paid $168 million for 52 percent of Chinese online travel agent eLong Online retailer Amazon.com purchased local player Joyo.com for $75 million, and online job search leader Monster.com bought a 40 percent stake in ChinaHR.com for $50 million.