By Michael Liedtke, Technology Writer

SAN FRANCISCO (AP) --

Google Inc. recently set aside $500 million to cover a possible settlement of a U.S. government investigation into the Internet search leader’s distribution of online ads from illegal pharmacies, according to a report published Thursday.

The Wall Street Journal said the U.S. Attorney’s office in Rhode Island and the U.S. Food and Drug Administration have been leading the criminal probe into whether Google improperly profited from ads promoting drug sales by pharmacies or people without the proper licensing. The newspaper cited unnamed people familiar with the matter.

Spokespeople from Google, the FDA and Peter Neronha, the U.S. Attorney in Rhode Island, all declined to comment Thursday.

The Journal’s article illuminates a mystery triggered earlier this week by a bombshell contained in Google’s quarterly filing with the Securities and Exchange Commission.

The SEC documents included a vague reference to a Justice Department investigation into the usage of Google’s automated system for placing ads alongside search results and other content at hundreds of thousands of websites. Google raised even more intrigue by subtracting $500 million from its first-quarter earnings to cover a potential settlement.

Google co-founder Sergey Brin then dodged a reporter’s question about the government investigation at a software developers’ conference presented by the company in San Francisco.

The evasiveness raised questions about how deeply the government might be digging into Google’s ad network, a moneymaking machine that is expected to generate more than $30 billion in revenue this year. Regulators in Europe are already taking a broad look at how Google’s ad system works as part of an antitrust investigation into whether the company’s business practices are stifling competition.

Although this U.S. probe appears to be focused on a narrower issue, it’s still a touchy matter for Google.

Besides sticking Google with a big bill, the inquiry could draw more attention to how vulnerable Google’s automated system has been to the machinations of shady operators.

Google acknowledged the problem in a federal lawsuit filed last fall against dozens of “rogue” online pharmacies that were finding ways to place ads for drugs despite the company’s efforts to prevent the abuses. The individuals identified in the complaint were based in New York, Tennessee and Ohio.

In one of the more common practices, the illicit drug dealers would plug subtle misspellings of drug names frequently entered into Google’s search engine to generate ads alongside the results. For instance, one illegal drug advertiser spelled the anabolic steroid Dianabol as “Diano bol” in Google’s automated system to produce an ad, according to the lawsuit in San Jose federal court.

Google has obtained court orders banning some of the rogue pharmacies named in the lawsuit and is still seeking injunctions against the others.

“Rogue pharmacies are bad for our users, for legitimate online pharmacies and for the entire e-commerce industry,” Google lawyer Michael Zwibelman wrote in a company blog post on the same day the company filed its lawsuit in September. “So we are going to keep investing time and money to stop these kinds of harmful practices.”

The lawsuit came seven months after Google imposed new restrictions on the kinds of pharmaceutical ads it would accept in the U.S. and Canada. The new rules were supposed to only allows ads from U.S. pharmacies that had been accredited by a special program run by the National Association Boards of Pharmacy. In Canada, the accreditation had to come from the Canadian International Pharmacy Association.

Google’s critics have complained in the past that the company and other websites haven’t been vigilant about policing pharmaceutical ads because they are so lucrative. Drug and health care advertising generated about $1 billion in Internet spending last year and is expected to grow to nearly $1.9 billion by 2015, according to the research firm eMarketer Inc.

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