Apple (AAPL), which recently overtook Microsoft (MSFT) as the technology stock with the world’s largest market capitalization, and newer kid on the Silicon Valley block Google (GOOG) are locked in a bitter battle these days. The rivalry started to escalate back in late 2007, when Google released its Android operating system for handheld devices to the public. This move signaled Google’s intent to enter the booming smartphone/mobile Web market and challenge Apple’s dominant iPhone and iPod Touch franchises. And now Apple appears to be striking back with an aggressive effort to break Google’s stranglehold on the online advertising sector.

In April, Apple unveiled a cutting-edge mobile advertising system that will be built into many of its products, including the new iPad line. The system, which will be known as the iAd advertising network, will enable marketers to place ads in the tens of thousands of applications that are currently available through Apple’s hugely successful App Store. (Apple will receive 40% of the ad revenues, while the app developers will get the remaining 60%.) The iAd network advertisements will also be interactive (rather than static) and, thanks to the GPS capabilities of most new handheld devices, customized. (Consumers connecting to the Internet via a cellphone or tablet may well see different ads depending on where they are in the U.S. or overseas.) These features should appeal to marketers endeavoring to make the most of their advertising dollars and connect with young, on-the-go consumers.

Still, just how successful the iAd network will ultimately be is far from clear. Google is a formidable, deep-pocket competitor with lots of experience selling search ads. And the firm’s new mobile advertising strategy, centered on getting OEMs to make smartphones and tablets featuring its Android operating system, appears to be gaining traction. Notably, Android recently surpassed Microsoft’s struggling Windows Mobile platform in terms of global market share, and it now looks to have Apple’s popular iPhone operating system in its sights.

Google, meantime, is looking to duplicate Apple’s apps success, which will give it a larger platform for selling advertisements. Indeed, the company is now offering developers big monetary incentives to build applications that run on Android. And it is trying to enhance its mobile advertising position further via acquisitions. Late last year, Google agreed to buy privately held AdMob Inc., the largest independent mobile advertising network, for $750 million. The deal raised antitrust questions and was closely scrutinized by the Federal Trade Commission. But it finally closed in May. This was a major win for the search giant, since the addition of AdMob instantly increases Google’s share of the fledgling mobile advertising segment.

A lot is at stake in this latest Apple/Google skirmish. Though the mobile advertising market is still in its infancy, it is expected to explode over the next few years. In fact, industry watchers estimate that domestic spending on mobile advertising alone will reach $1.5 billion by 2013, up from just over $400 million last year. Smartphone sales, meanwhile, are also expected to skyrocket as the 2013-2015 period draws near.

At the end of the day, both Apple and Google may succeed -- to varying degrees -- in the mobile advertising market, with no clear winner emerging. One thing is certain, however. This will be a very interesting space for investors to watch in the years ahead.