BEIJING, July 19 (Reuters) - Alibaba.com Corp., China's world-leading export/import Web site, said on Monday it would invest $42 million in its online auction subsidiary Taobao.com to compete with eBay Inc. (EBAY.O) and Yahoo Inc. (YHOO.O).

The new funding, which comes from the firm's existing cash stockpile, will go toward improving technology, increasing marketing and hiring at least 20 more employees, Alibaba Vice President Jin Jianhang told Reuters.

"We're very confident about the development of this sector," he said by telephone. "We need the new investment at this time as the online shopping sector develops."

China has at least 80 million Internet users, the second-largest in the world behind the United States, with an online shopping market expected by some analysts to nearly double to $500 million in 2004.

Alibaba, which says it is profitable, spent $12 million to launch Taobao.com last year as a competitor to eBay in China, the world's fastest growing major Internet market.

Jin said Taobao, which means "searching for treasure", is offering free services to attract a critical mass of users and would not be profitable for at least another two years. Rival Yahoo's auction site is also free.

Alibaba Chief Executive Jack Ma has said Taobao.com was China's top Internet auction site, with nearly 2 million items for trade, twice that of its closest competitor, eBay.

Both Alibaba and Taobao have been targets of widespread speculation about listing plans, but Ma told Reuters earlier this month he had no plans to go public in the forseeable future.