By Alistair Barr

SAN FRANCISCO (Reuters) - EBay Inc unveiled an expansion of its eBay Now same-day delivery service on Monday as the company battles with rival Amazon.com Inc for dominance of the emerging online local commerce market.

EBay Now, which delivers products from stores including Target, Walgreen and Best Buy in as little as an hour, was launched last year in San Francisco and San Jose, California and Manhattan, New York.

EBay is expanding the service to Brooklyn and Queens in New York and to the Bay Area peninsula, between San Francisco and San Jose. Chicago and Dallas will be added later this summer and the service may expand outside the United States in the future, eBay executives said last week.

EBay's expansion comes as Amazon builds more warehouses closer to customers, which will help the world's largest Internet retailer offer faster delivery.

EBay, which does not own inventory and mostly avoids running warehouses, is partnering with retailers to create a network of existing physical stores that will, in effect, operate as mini storage and distribution hubs for online purchases.

"This is eBay's answer to Amazon getting fulfillment centers closer to consumers," said Ron Josey, an analyst at JMP Securities.

Both companies are chasing the latest frontier in e-commerce: the 75 percent of retail spending that happens within 15 miles of home.

This is a $2 trillion-a-year market in the United States that includes products suited to immediate neighborhood shopping, such as cleaning products, groceries, health and beauty items, according to J.P. Morgan estimates.

If EBay, Amazon and other companies can deliver such products quickly enough, they could grab a bigger share of this local commerce market, J.P. Morgan analysts including Doug Anmuth wrote in a recent note to investors.

Google Inc, the world's largest Internet search company, is pursuing the same opportunity through its Google Shopping Express test, which started same-day deliveries in the San Francisco Bay Area earlier this year.

Palo Alto Toy & Sport, a Bay Area retailer, is on course to get about 5 percent of its sales this year through Google Shopping Express.

"It's a way to offer more than Amazon," said Miguel Natario, systems administrator at the retailer. "This gives us hope for increased sales."

Wal-Mart Stores Inc is also testing same-day delivery through its Walmart To Go program in a handful of cities.

For retailers using eBay Now or Google Shipping Express, this could help them get online orders that otherwise might have gone to Amazon.

"If you want something quick, it's even quicker than Amazon," said Matt Nemer, an analyst at Wells Fargo. "Amazon doesn't have physical stores really close to consumers, so that's an edge retailers have."

GROUPING DELIVERIES

Same-day delivery works best if online orders are grouped together from many different stores in the same area, eBay Chief Executive John Donahoe said.

"No one retailer can do that on their own," he added. "We are a consolidation point to help make the economics work."

EBay Now charges $5 for fast deliveries of online orders over $25, however Wall Street is concerned that the company will struggle to make a profit from the service.

Donahoe said that aggregating as many orders as possible from as many stores as possible in a small area will help.

"You want scale and density," he explained. "If we can consolidate 20 retailers and get 200 or 300 deliveries a day in a single area, it lowers the cost."

EBay currently uses its own couriers, however the company is testing a new approach that uses other couriers, effectively plugging online orders into existing delivery routes.

"We are testing the collaborative consumption approach," Donahoe said, comparing the new effort to Uber, a start-up that matches empty limousines and cabs with people needing a ride.

"At any given moment there's a driver two minutes away from everywhere," Donahoe said. "If we have a delivery person five minutes away from any retailer and five minutes from any consumer you can make it more economical."

This approach has the potential to lower the cost of eBay Now, according to Gil Luria, an analyst at Wedbush Securities.

"EBay is paying its own couriers and they may be sitting around for much of the day," Luria said. "If they use outside couriers who are already making other trips in the area, then eBay will only pay for specific deliveries."

(Reporting by Alistair Barr; Editing by Tim Dobbyn and Carol Bishopric)