Eliot Spitzer, New York State Attorney General, has reached an agreement with the firm to disclose clients' rights and liabilities more accurately.

Customers who buy goods on eBay, which then fail to turn up, are not always due a refund if they pay with Paypal.

Most credit-card issuers, by contrast, offer refunds in such circumstances.

Full disclosure

Paypal has agreed to pay $150,000 to settle the New York case.

The firm is not obliged to begin offering so-called "chargebacks", the technical term for credits or refunds offered in case of fraud by a merchant.

Last year, Discover - the credit-card division of Morgan Stanley - and American Express agreed to start offering chargebacks for eBay transactions.

Paypal, which does not fall under the same regulatory regime as credit-card providers, has agreed to be more open with the exact level of protection it offers its 25 million customers.

Last year, transactions worth more than $12bn passed through PayPal, which is by far the biggest online payment processor.

EBay bought Paypal in 2002, and is keen to push as many deals as possible through the system.

Cases to answer

There are still question marks over Paypal, however.

The firm has admitted that it faces investigations in several states, and from the Federal Trade Commission.

No details of these cases are available, but eBay said they related to its "restriction and disclosure practices" - in other words, probably the same areas as the New York case.

PayPal has aroused considerable criticism from eBay's army of users, however.

The main complaint is that the firm is wont to freeze accounts it considers suspicious, often for months on end.