Shares of the video rental chain jumped more than 7 percent in extended trade after the news. Circuit City's shares fell 1.6 percent, after declining nearly 12 percent at Tuesday's close.

Blockbuster's Chief Executive Jim Keyes cited "market conditions" as a reason for withdrawing its offer, valued at up to $1.3 billion, and said the deal was not in the best interests of its shareholders.

In a brief statement, Keyes said the company, which is in the middle of turnaround efforts, continues to believe in the "strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand."

But Blockbuster would now use its stores "as a way to diversify the business and better serve the entertainment retail segment," Keyes said.

Blockbuster in April disclosed that it had offered to buy Circuit City in February for $6 to $8 a share, or up to $1.3 billion.

(Reporting by Anupreeta Das in San Francisco and Nichola Groom in Los Angeles, editing by Phil Berlowitz and Carol Bishopric)