The online payments firm, owned by eBay, claims that the team behind Google's new system misappropriated trade secrets by poaching its staff.
The lawsuit emerged just hours after Google launched Google Wallet in New York on Thursday.
PayPal alleges that Google and Osama Bedier "have misappropriated PayPal trade secrets by disclosing them within Google and to major retailers". Mr Bedier, Google's vice president of payments, was formerly a senior Paypal executive.
Google Wallet will use Near-Field Communications chips built into Android handsets to allow users to "wave and pay" at retailers that have MasterCard's contactless point of sale equipment. Launch partners include Macy's department store and the sandwich chain Subway.
PayPal, which is the leading payment system on the web, is developing its own smartphone payment system for retailers, to compete with Google and others. Apple is also expected to enter the fray this year.
When Mr Bedier moved from PayPal to Google in January there was no hint of acrimony.
"I want to personally thank Osama for his friendship and leadership," said PayPal's chief technology officer Scott Guilfoyle as he announced the departure.
But in its lawsuit PayPal accuses Mr Bedier of transferring "up-to-date versions of document's detailing PayPal's mobile payment and point-of-sale strategies to his non-PayPal computer just days before leaving".
"By hiring Bedier, with his trade secret knowledge of PayPal's plans and understanding of Google's weaknesses as viewed by the industry leader, Google bought the most comprehensive and sophisticated critique of its own problems available," it says.
It is also alleged that Mr Bedier was in secret negotiations for the Google with Larry Page, a co-founder of the search giant, at the same time that he was working on a deal between the two firms. PayPal hoped to become a payment option for Android apps, but Google backed out once it began courting Mr Bedier, it is alleged.
Meanwhile Stephanie Tileneus, another former PayPal executive who left for Google in 2009, is accused of breaching a contract that banned her from poaching colleagues by encouraging Mr Bedier to switch sides.
PayPal is seeking damages and a "reasonable royalty for Google and Bedier's masapproriation of trade secrets".
A Google spokesman said its lawyers had not yet received the complaint so could not comment.