Under the settlement, PayPal will not process payments from New York residents to Internet casino sites beginning on Sept. 1 and will pay $200,000 to the state for its profits, the cost of investigation and penalties.
"This agreement continues the work of my office to enforce the law prohibiting illegal gambling, online or off line," Spitzer said. "This case shows that we intend to stop any company who facilitates illegal gambling transactions."
A PayPal spokesman didn't immediately respond to a request for comment. EBay, the Internet auction site, has said that if its planned acquisition of PayPal is successful, the service would no longer be associated with online gambling.
PayPal lets buyers and sellers exchange money through e-mail. Buyers make payments online through credit cards and bank accounts, and PayPal relays the funds to sellers' accounts.
The company's dealing with 260 online gambling merchants has increased as more credit card firms have blocked direct payments to Internet gambling Web sites, Spitzer said.
In June, Spitzer settled a case with Citibank to block all online gambling transactions through credit cards.
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