(Reuters) - Shares of United Parcel Service Inc and FedEx Corp fell on Thursday after a report that Amazon.com Inc was testing its own delivery service, potentially encroaching on the territory of the package delivery companies.

Amazon will oversee pickup of packages from warehouses of third-party merchants selling goods on its website and their delivery to customers' homes - a function often handled by longtime partners UPS and FedEx, according to sources cited by Bloomberg. (bloom.bg/2xVrUWO).

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UPS' shares fell as much as 2 percent to $116.52, while those of FedEx dropped 1.6 percent to $217.77.

Amazon is testing a delivery service to make more products available for free two-day delivery and relieve overcrowding in warehouses, two people familiar with the plan told Bloomberg.

When contacted by Reuters, Amazon said it was using the same carrier partners to offer the program that it has used for years, including UPS, USPS and FedEx.

FILE PHOTO The logo of the web service Amazon is pictured in this June 8, 2017 illustration photo.
Reuters/Carlos Jasso/Illustration

Morningstar analyst Keith Schoonmaker downplayed Amazon's potential threat, saying the retailer constitutes a mid-single-digit proportion of earnings at UPS and low-single-digit at FedEx.

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(Reporting by Sanjana Shivdas and Ankit Ajmera in Bengaluru; Editing by Saumyadeb Chakrabarty)