The agreement is the most high-profile so far for the four year old company and will see it stream 10,000 hostels and hotels into the main InterRail website and provide full search and booking facilities.
The Hostelbookers site is also expecting to undergo a major relaunch this summer as part of a three-strand overhaul of its online presence.
The first stage will see a redesign of the site including the addition of new destination guides and other editorial content, an enhanced user review system, free-text search and language sites for France, Italy, Germany and Spain.
A second phase, earmarked for later this year, will include personalised features such as a MyHostelbookers and trip planning functionality.
A flight search area is also likely to be added to the site during 2008.
The company has ambitions to become and market itself as a fully fledged online travel agency over the next few years once flights and further hotel inventory are added to the site.