The video website YouTube is preparing to link up with Hollywood to show full-length films for free over the internet, it has emerged.

The site - already used by millions of people every day to watch short video clips - confirmed that it was in negotiations with major studios as it gets ready to launch an online movie service. "Our goal is to offer maximum choice for our users, partners and advertisers," the company said in a statement.

Free films, running with advertising, would mark a radical advance for the video-sharing website as it looks to profit from its massive popularity.

It is not clear which Hollywood studios are involved in the discussions. But one report from the CNET news website suggested a YouTube movie service could arrive within 90 days.

The development is part of a drive to increase profits at the video website, which has struggled to meet financial expectations since Google bought it for $1.65bn in 2006.

YouTube contributors can now run advertising over their videos or add links to music and DVDs sales from iTunes and Amazon. A movie deal would also build on a recent agreement with the TV network CBS whereby the broadcaster's shows are screened online, with advertising, in return for a share of the revenue.

The decision to link up with the film industry is also driven by rival moves by websites which already show full-length films and high-quality TV. The BBC's iPlayer has shown more than 160m programmes in the past year, and Hulu, a website backed by the American networks NBC and Fox, which has a vast library of TV programmes and films, has rocketed in popularity since it launched last year.

The internet retailer Amazon has also started streaming some films on IMDb.com, the UK-based online film database that it bought 10 years ago.

The developments tap into the move towards on-demand viewing rather than traditional scheduling, according to Jon Gibs, vice president of the ratings company Nielsen Online. "Consumers are increasingly relying on the web to catch up on content they missed when it aired on television, and the networks are beginning to capitalise on this trend."

He said, as an example, that "anyone who didn't see Tina Fey's impersonation of Sarah Palin on Saturday Night Live had to log on and watch it or risk having nothing to say around the proverbial water cooler".

For Hollywood, the change reflects shifting patterns of behaviour. Although DVD sales remain relatively strong, with sales worth more than £2bn in the UK last year, recent figures from the research group Ipsos suggest that TV now accounts for just 55% of all video watched by teenagers.

Not all of Hollywood is likely to be joining forces with YouTube, however. Paramount and DreamWorks are unlikely to sign up since the website is locked in a billion-dollar lawsuit with their parent firm, Viacom, over allegations that YouTube encouraged copyright infringement.