Personally, I do not think that Google Checkout would be an alternative to Paypal. The only similiarity is that both has a Checkout Button/Buy Now Button and they offer low fees but beyond that, they are different. Google Checkout seems more like an alternative to other payment providers like 2checkout or Worldpay but that is all it is. Paypal supports payment other than through major credit cards, it also supports funds transfer from one paypal to another paypal account. Google Checkout only supports credit card payments and that's all. Paypal has subscription mode support which Google Checkout does not have. If you do not have standard pricing and through a Buy Now button on your website, Paypal does a better job.
GoogleCheckout IS ramping up to compete head to head. You can already send out invoices via email and place the buy now buttons on your site in one click. You can also integrate with your shopping cart very easily. I noticed today that GameFly uses them in addition to their shopping cart. For a service that's only 6 months old and is facing a monopolistic PayPal, I'd say they are doing well. It's a strong reflection of the anti-PayPal sentiment many hold.
If this will happen there will be lot of people will be happy on these features by Google. But not as of this moment. It was rumored before that Google will kick paypal out from the business but it didn't happen. It was actually rumored to be called Gbuy.
google checkout is now an alterntive to paypal because paypal old company and a lot of firms accept that. Google best alternative to 2checkout i think.