Updated from 1:31 p.m. EDT

Blockbuster ( BBI) shares surged Wednesday after the DVD-rental company said it will deliver digital movies from its library directly to TiVo ( TIVO) set-top boxes.

The combination will allow TiVo subscribers to buy and rent movies through Blockbuster's OnDemand service using integrated DVRs. Blockbuster said it will begin to sell TiVo DVRs in its store locations and through its Web site, giving both companies new distribution outlets.

The agreement helps the struggling Blockbuster take aim at rival Netflix's ( NFLX) migration from a strict DVD-by-mail model to one that focuses more on streaming its catalog of movies and television shows via the Internet.

While shares of Netflix have surged 43% in 2009, Blockbuster has dropped 33% as the company has grappled with rumors of bankruptcy. Several media outlets reported earlier this month that Blockbuster had hired a firm to advise it on a bankruptcy filing, citing people familiar with the situation.

However, a spokeswoman later refuted those reports and told TheStreet.com Blockbuster hired the law firm to assist it with ongoing capital raising initiatives.

What's not clear is whether the combination will help Blockbuster turn the tide in its favor. In October, Netflix and TiVo announced that they had teamed up to stream Netflix's library of movies to TiVo subscribers. At the end of its fiscal fourth quarter on Jan. 31, TiVo said it had 3.3 million subscribers, all of which now have access to both Blockbuster's and Netflix's streaming services.

Netflix also has several other partnerships for its Internet streams. In addition to watching movies on their home computers, Netflix subscribers can watch movies on their television sets using Microsoft's ( MSFT) Xbox 360, Roku set-top box or Samsung Blu-ray DVD player.

For now, though Blockbuster and TiVo investors like the news. Shares of Blockbuster rallied 9.6% to close at 80 cents, and TiVo rose 3.2% to $7.20. Shares of Netflix, meanwhile, sank 4.3% to finish at $41.56.

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