Google Inc took a major step in its row with the Chinese government on Tuesday by redirecting traffic from its Beijing-based search engine to its service in Hong Kong.

The move effectively means the company no longer needs to filter its search results, as required by Chinese law.

Although Google's exit is good news for its rivals, chiefly Baidu, Sogou and up-and-comer Tencent, many experts said it is a "lose-lose situation" for both China and the US-based company.

The initial reaction from the authorities came via an unnamed State Council information official who told Xinhua News Agency that Google had "violated its written promise it made when entering the Chinese market (in 2006) by stopping filtering its search service and blaming China, in insinuation, for alleged hacker attacks".

"This is totally wrong. We're uncompromisingly opposed to the politicization of commercial issues, and express our discontent and indignation to Google for its unreasonable accusations and conduct," the official said.

However, just hours later, Foreign Ministry spokesman Qin Gang told a regular press briefing that the government would handle the case "according to law", and that the move was an isolated act by a commercial company and should not affect China-US ties "unless politicized".

Philip Crowley, a US State Department spokesman, said on Monday it was "a decision for Google to make".

It is unclear whether the move will go on to impact bilateral ties, while uncertainty also remains on whether Google's revenue, and that of its Chinese partners, will be affected.

TOM Online, a mainland Internet company run by one of Asia's richest men, said on Tuesday it has ended its affiliation with Google Inc, after "the expiry of their agreement".

"TOM reiterated that as a Chinese company, we adhere to rules and regulations in China where we operate our businesses," said a statement by its parent company, Hong Kong-based TOM Group, which is controlled by Hong Kong tycoon Li Ka-shing. The company declined to say when it stopped using Google services or to provide any details

of its agreement with Google. Many of Google's other Chinese partners, such as free music service Orca Digital, insisted the redirecting of Google.cn and Google.com traffic to its Hong Kong website will have little impact on their partnerships.

"Google.cn is only one gateway so it doesn't have a significantly impact to us," said Orca chief executive, Gary Chen, whose firm has received investment from Chinese basketball star Yao Ming. He said his company may keep its partnership with Google through its global website and believes the Chinese government would not oppose that. "I believe they can still find a solution," he said.

Orca generated 5 million yuan (US$730,000) in the fourth quarter of 2009 - most of which came through Google's advertising platform - and Chen said he expects that figure to double this year despite Google's closure of its China-based operations.

About 40 percent of Google China's revenue is generated through its global advertising network, which would not be impacted by the shutdown of Google.cn, according to Edward Yu, president of China-based market research firm Analysys International.

However, while Google's departure from the Chinese Internet market - the largest in the world with more than 350 million users - provides new opportunities for its rivals, such as Baidu, NetEase, Tencent and even Microsoft, in the long run the market will suffer due to a lack of competition, he said. Baidu had almost a 60-percent share of the market in China in the fourth quarter of last year, with Google accounting for 35 percent, show figures released by Analysys International. The closest domestic challenger to Baidu is Sogou, developed by Sohu.com, which has just a 1-percent market share.

"It seems Google doesn't really want to leave China but they have to do something because of its announcement in January," said Yu. "Maybe the company will come back to the mainland in two or three years."

Google has invested about US$380 million since 2007, according to government figures. However, analysts estimate its annual revenue in China ranges from US$300 million to US$600 million, a small portion of its US$24-billion annual revenue.

The company plans to maintain an advertising sales force as well as its large research and development operations in China. However, it risks losing market share, revenue and staff to rivals. Opportunities to develop and market its Android and Chrome operating systems for cell phones and computers in China could also be threatened, a potential setback for partners such as handset makers Dell and Lenovo.

"If Google leaves its R&D unit in its current headquarters in Beijing ... the staff will remain, so I think our activities will continue," said Arthur Wang, chairman of Beijing Google Technology User Group, one of Google's largest software development groups. Advertisers, however, could take a more cautious approach until they see if traffic to Google's Hong Kong site gets the same traffic as its shuttered China site, said Kaiser Kuo, a China-based technology commentator.

Google.hk refused to reveal its market share in the region. However, Antony Yiu, North Asia director for online marketing agency iProspect, said Google.hk occupies about

40 percent and predicted the redirection of traffic from the mainland "will have limited influence on its business".

Jessica Powell, a Google spokeswoman, said a meeting was called to update all 600 staff at its headquarters in Tsinghua Science Park, Beijing, on Tuesday but declined to give details. "We haven't worked out all the details so we can't ever rule out letting people go, but we very much want to avoid that," she said.

Google employees were tight-lipped as they hurried to work past waiting reporters, and the blinds were drawn on most of the windows. Chinese passers-by laid flowers and chocolates on its large metal "Google" sign. However, online a few Chinese netizens displayed their anger at Google's decision. "Go away, Google," wrote a netizen named Kaisei on sina.com, a popular news portal. "It wants to earn money from China but doesn't want to obey our laws."

It is not clear whether the Chinese government will block Google.hk in response to Tuesday's move. The company's Gmail e-mail service was still accessible from within China, as was its news page. However, attempts to call up specific articles on China were blocked.

"There are probably many debates going on at the top about what to do next. The ball is now in the Chinese government's court," said Duncan Clark, chairman of BDA China, a domestic investment consultants.

In a Xinhua report, a State Council official said the government talked to Google twice to try to resolve the standoff and suggested China's laws requiring websites to censor themselves is non-negotiable.

"We gave patient and meticulous explanations to the questions Google raised ... telling it we would still welcome its operation and development in China if it was willing to abide by Chinese laws, while it would be its own affair if it was determined to withdraw its service," the official was quote as saying. "Foreign companies must abide by Chinese laws and regulations when they operate in China."

China is open to foreign investment, with more than 480 of world's top 500 companies already in the domestic market, according to a Xinhua editorial published on Tuesday. "There's no reason to say China's investment environment is getting worse when Google suddenly wanted to break its commitment," it said.