PALO ALTO (CNET) – Facebook will soon begin testing a service that will provide its members local discounts, a move that will put it in direct competition with daily-deals giant Groupon.

The service will be tested in San Francisco, Dallas, Austin, Atlanta, and San Diego, and will expand on the social-networking giant’s Deals program, which offers users deals to members when they use Facebook Places to check in at local business, the company said. Members will be able to buy deals and share them with their friends on the network.

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“Local businesses will be able to sign up to use this feature soon and people will be able to find deals in the coming weeks,” the Palo Alto-based company said in statement Monday.

Facebook plans to sell the deals through its own sales team, as well as working with partners such as Gilt City, Home Run, Pop Sugar City, Tippr, KGB Deals, Plum District, Reach Local, Zozi, and Open Table.

With 500 million members, Facebook will bring a sizable user base in its challenge for dominance in the deals market, which brought in $873 million in revenue last year and could bring in $3.93 billion by 2015, according to a projection from consulting firm BIA/Kelsey.

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Chief among those competitors is Groupon, which has been riding meteoric growth with half-price massages, discounted restaurant meals, and travel bargains. Chicago-based Groupon, with 60 million users and more than 39 million deals sold in its two years in business, is expected to beef up its muscle with an initial public offering later this year.

In addition to Groupon, Facebook will have to contend with a host of “Groupon clones,” including deals site LivingSocial, which announced a $175 million investment from e-commerce giant late last year.

Facebook will also face competition from Google, which over the past couple of years has been losing employee talent to the social-networking giant. Just a month after being rebuffed in a buyout offer of Groupon, Google confirmed in January that it’s preparing to launch its own social-buying competitor called Google Offers.

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