According to early reports from the Associated Press and Variety, Google is set to make a major announcement tomorrow concerning YouTube integration with AdSense. Selected YouTube videos will be available to AdSense publishers and will appear wrapped in banner ads.

The AP offers auto websites selecting topical videos from YouTube about cars to run along with AdSense banner ads on their sites. If the report is correct, there's a whole lot of potential here. Though cynics have said that there's little hope for video outside YouTube, small video ad networks insist that there's a growing, thriving ecosystem of niche video sites just waiting for more and better content and ads.

Monetization of YouTube has always been the big question since Google Acquired the site. While other video hosting companies sought content first and then tried to build out their ad networks, it's only logical that the biggest online ad network in the world would fold the best content from the biggest video site in the world into its offerings. For more industry background see Liz Gannes's post at NewTeeVee.

Ads have been run along side a very select few user channels on the YouTube site for a handful of months but these reports indicate that the program will be made much wider and be taken off of the site all around the web. Google has run very limited video advertising already but nothing like what it could do with YouTube's huge catalog. The ads will be persistent banners outside the frame and fading in-frame overlays.

It's a simple story, but if it is true it is going to blow the world of online video and advertising wide open.

Update: Google has confirmed this: "AdSense isn't just for ads anymore; it's also a place to get video content for your site -- and earn extra revenue at the same time." There is an accompanying video: