(Reuters) - Google Inc announced a major overhaul of the DoubleClick ad exchange it acquired last year, an important step in the Internet search giant's plan to extend its advertising business into the market for graphical, display ads.

Google acquired DoubleClick for more than $3 billion in March 2008, in hopes of supplementing its lucrative business serving text-based ads alongside search results with the more visual display ads used in corporate branding campaigns -- a market dominated by online rivals Yahoo Inc and Time Warner's AOL.

Ad exchanges play an increasingly important role in the Internet ad industry by providing a forum for publishers to sell the unsold ad space on their websites to the highest bidding advertisers. The market for online advertising has become more fragmentary as Web users spend more time on social networks and blogs instead of relying on portals and other destination sites.

With Thursday's announcement, Google will for the first time combine the DoubleClick exchange with its own advertising system and technology.

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"We want to make display advertising as accessible and open as possible, like search advertising is today," Neil Mohan, vice president of product management at Google, said in an interview with Reuters.

Mohan said the new version of the DoubleClick exchange features tools that allow brand advertisers to more precisely target the audiences their ads are shown to and to monitor the results.

And Google is linking the DoubleClick exchange to its own advertising auction systems -- AdWords and AdSense -- significantly expanding the number of marketers and Web publishers that can use the exchange.

"The way the DoubleClick exchange was set up previously, it just didn't have enough liquidity," said ThinkEquity analyst William Morrison.

According to Google, more than 40 percent of online ad inventory often goes unsold because publishers don't have an efficient way to sell the slots.

The latest changes to the DoubleClick exchange could make Google the dominant exchange for display advertising on the Internet, said ThinkEquity's Morrison, though he noted that it would not happen overnight.

Yahoo currently operates the largest ad exchange through RightMedia, a business that Yahoo purchased for $650 million in 2007.

In a statement, Yahoo said it expected the market for online display ads to be fragmented and for there to be other ad exchanges.

"We welcome these exchanges, and look forward to working with them and integrating with them for our partners," said the statement.

In July, Google CEO Eric Schmidt said that display advertising is likely to be "the next billion dollar business" at Google.

Google generated nearly $22 billion in sales last year, virtually all of it from its paid search ad business, according to analysts.

(Reporting by Alexei Oreskovic; Editing Bernard Orr)