It's a great time to be an Internet shopper, but the same search technology that is transforming the Web into a bargain-hunter's paradise is putting the squeeze on online retailers doling out discounts and incentives to lure customers.

As the holiday shopping blitz approaches, generally accounting for about one-third of annual online sales, Internet retailers are under pressure to keep up with a fast-changing market.

One early forecast sees online holiday sales rising as much as 20 percent from last year's $18.5 billion. This year, retailers will be working even harder to earn a buck as the growing popularity of search-based comparison shopping engines like Shopping.com (IBUY.OB: Quote, Profile, Research) , BizRate.com and NexTag.com fuel an intense battle to deliver the lowest prices.

"We believe the heavy competition on the Web has created a new level of promotion, which is sure to suppress margins" for online retailers, Piper Jaffray analyst Safa Rashtchy said in a recent note.

Meanwhile, search providers and shopping comparison sites - the Web's new gatekeepers - stand to reap big rewards for connecting buyers with the best deals, he said.

Major Internet operators, who have worked hard to win the trust of consumers, are moving into the search space to protect their flanks and hopefully cash in on the new opportunity.

Amazon.com Inc. - known for its personalization technology that recommends products to individual users - has launched its own Web search unit called A9, offering a small, advertising-financed discount to users.

AOL recently overhauled its online shopping center to better compete with Yahoo Inc., Google Inc., which offer comparison-shopping tools based on Web search.

A preliminary forecast from Ernst & Young, calls for a 15 percent to 20 percent rise in holiday online sales.

Jupiter Research expects 2004 online sales to jump 24 percent year-on-year to $65 billion, excluding travel, automotive, auctions and prescription drugs.

Annual online sales grew 28 percent in 2003, 33 percent in 2002 and 29 percent in 2001, Jupiter analyst Patti Freeman Evans said. She added that sector growth is seen cooling around 2006 under the weight of a maturing market and a bigger base for comparison.

Online and offline holiday retail sales were up 5.2 percent to $216.3 billion in 2003, according to the National Retail Federation. This year's growth is expected to again be in the single-digits on strong repeat performances from the apparel and consumer electronics sectors.

Online retailers have put the mishaps of Christmas past behind them: Who can forget the shipping snafus of the late 1990s that left children without toys on Christmas morning? But as they strive to lower prices, they also are under pressure to deliver ever-better selection and service to the growing number of shoppers accessing the Web via home broadband connections.

The coming holiday season will be Sears.com's first for selling apparel and home fashions. Its "Virtual Decorator" feature helps shoppers see how a bedspread, curtains or side table would look in a room that can be made to resemble the real thing at home.

Sears.com sister site Landsend.com is expanding the reach of its custom-fit tool from categories such as jeans, chinos and men's dress shirts to include its outdoorsy men's "Marinac" jacket, which can be cut to order, with extras such as an inside pocket for an MP3 player or underarm zippers for ventilation.

"You're constantly tweaking and upgrading. You're constantly adding more capacity," said Bill Bass, who oversees e-commerce for Sears, Roebuck and Co. and its Lands' End specialty clothing brand.

"We spend the entire year getting ready for Christmas," said Mark Vadon, chief executive of diamond engagement ring seller Blue Nile Inc., which has enhanced visualization tools in its "Build Your Own Ring" feature that allows users to search for diamonds and settings.

Patrick Byrne, president of Overstock.com, said the Salt Lake City-based online discounter is doing some very heavy lifting with a major investment in new computer systems.

"They almost failed last Christmas. We just couldn't keep up," he said, noting that the project involves equipment upgrades, enlarging bandwidth and swapping out home-grown software for more robust commercial products.

EBags CEO Jon Nordmark said his site is putting its entire catalog online for the first time this year and will again offer customers free second-day air-shipping upgrades.

"The time frames tightened up a lot last year. People have higher expectations of sites to get things there at the last minute," Nordmark said.