The company's shares were halted by the New York Stock Exchange for news dissemination, triggering a suspension in share trading.

Shares of the debt-laden firm plummeted more than 76 percent in the morning before their suspension, while shares of online arch-rival Netflix jumped more than 13 percent.

The largest U.S. film rental chain, which has been scrambling to cope with the increasing popularity of online video, has appointed law firm Kirkland & Ellis LLP to evaluate its restructuring options, including a possible bankruptcy, the source said. Blockbuster is also working with turnaround specialists at investment banking firm Rothschild, the person said.

Blockbuster has not responded to requests for comment.

The company is struggling to reinvent itself with increasing numbers of customers migrating to video downloads or mailed rentals, while also restructuring hundreds of millions of dollars in debt.

Executives had said in November that the firm would face challenges refinancing its debt.

"Blockbuster has been facing some liquidity issues for a while now and this is one of the options they have. It's not a great one," said Edward Woo, Wedbush Morgan Securities.

"I don't think it's going to result in a liquidation like Circuit City, but if you're doing business with them, it's not a great thing," he said.

Woo estimated that Blockbuster had spent $2.7 billion on product and inventory costs, which was mostly video games and DVDs, in 2007.

(Reporting by Emily Chasan, Gina Keating, Sue Zeidler, and Edwin Chan; Editing by Bernard Orr)