Google’s announcement that the upcoming Android 2.0 update will offer free turn-by-turn GPS has sent stocks for major GPS manufacturers reeling.

The web was abuzz yesterday with news that Android 2.0, set to debut with the hotly anticipated Motorola Droid, will offer free turn-by-turn GPS. The feature is called Google Maps Navigation, and it will provide all the trimmings of a dedicated GPS unit, including: Free lifetime map updates, text and speech direction input, traffic reports and audible directions. A persistent cellular connection also gives Navigation-equipped mobiles access to Google’s Street View and PC-free updates–features not offered by traditional GPS units.

While future Droid owners celebrate their victory, the announcement has panicked investors for the market’s biggest GPS makers, TomTom and Garmin. Shares of Garmin (GRMN) have fallen nearly 17% since Wednesday to $31 USD, while sympathetic performance in Dutch rival TomTom (TOM2.AS) has submarined their stock by 29% to trade at €7,40.

Analysts say that the losses are exacerbated by fears that the navigation market is in terminal decline. Investors are quick to point out that the Garmin/TomTom GPS duopoly has been eroded by market entries from Research In Motion (RIM.TO), Palm (PALM.O), Nokia (NOK1V.HE) and even Apple (AAPL.O).

“Google’s announcement today introduces new challenges for both Garmin and TomTom and makes the threat from smartphones more real than it ever was before,” told Reuters on Wednesday.

And the Motorola Droid is only the beginning. The Android 2.0 update, codenamed Éclair, is compatible with virtually every model in the rapidly growing array of Android-powered phones. Though the 2.0 update is subject to carrier approval, many believe that popular devices like the HTC Magic, HTC Hero and Motorola Cliq will soon receive the update as well.

The Motorola Droid with Google Maps Navigation will debut on November 6 exclusively on Verizon Wireless in the United States.