"People thought it was a bad deal, and Blockbuster shares went down," Wedbush Morgan analyst Edward Woo said. "Now people think the deal is going to get passed off and the stock is going up."

Woo said investors also may be reacting to Monday's steep plunge in Circuit City's share price over concerns about the electronic retailer's ability to turn its business around and prospects for the sale.

Circuit City posted a wider-than-expected quarterly loss last week and said its cash position fell to $92.2 million from $364.1 million a year earlier.

Investors speculated on Monday that the bad news would prompt Blockbuster to lower its takeover bid of $6 to $8 per share, or up to $1.3 billion, or abandon it.

A Blockbuster spokesman had no immediate comment on the progress of the transaction, which was disclosed in April.

Shares of Blockbuster rose as high as $2.84, before trading up 10.7 percent, or 27 cents, at $2.79 on the New York Stock Exchange at mid-afternoon.

(Reporting by Gina Keating, editing by Richard Chang)