PayPal, the electronic payment service, has agreed to block online gambling merchants from using its transaction system to accept money from gamblers who reside in New York State, the New York State Attorney General's office said on Wednesday.

PayPal will not process payments from New York customers to Internet casino Web sites as of September 1, and will pay $200,000 to New York state in disgorged profits, investigation costs and penalties.

Internet auctioneer eBay, which is in the process of acquiring PayPal, had previously stated that it plans to discontinue PayPal's online gambling business after it completes its $1.5 billion acquisition.

Approximately 260 online gambling merchants currently use PayPal.