You've probably seen that Google announced Compute Engine last week at IO2012. Available only in limited preview for now, its definitely an IAAS offering. You get one or another kind of Linux (Ubuntu, CentOS) and they use KVM. You can select different levels of performance. They mentioned numerous times a good working relationship with RedHat on making KVM awesome for this offering. Obviously Compute Engine is not as mature as some of the other IAAS offerings yet. They claim lower cost at scale and made a point of emphasizing the fact that your instances on your private IAAS network communicate over Google's own private network (speed, security, reliable performance. ) They encrypt all data at rest. They made a point of saying that they spent a lot of time making sure performance was predictable - you don't need to worry about unanticipated spikes or delays in VM startup or provisioning for example, they've invested to make sure its predictable. They have partnered with RightScale, Puppet, and others for tooling. I expect more partners.
Interesting note, they see App Engine as a great tool upon which to develop and host Google Compute management tools, orchestration, etc... They showed an interesting example of an app using App Engine, Google Storage, and Compute Engine. They've built in authentication infrastructure (service accounts) that makes that three-way integration feasible and easily programmable/scriptable. Its upon this App Engine basis that we've requested to participate in the Limited Preview.
They said more than once that Compute Engine can "unlock" you from PAAS - if you have code, 3rd party libraries, etc.. that can't run on App Engine, run it on Compute Engine. (Unless its Windows code, for now anyway, I guess.)
Here is the Introduction presentation at IO 2012: http://www.youtube.com/watch?v=0-sF5ZWB_FY
Here is the Technical Details presentation: http://www.youtube.com/watch?v=0-sF5ZWB_FY