NEW YORK (Reuters) - Video rental chain Blockbuster Inc. filed for bankruptcy protection yesterday after years of struggling to compete with online and mail-order movie services such as Netflix Inc.

Billionaire investor Carl Icahn and other hedge funds are among the lenders that have signed off on a restructuring deal giving them equity in the company, court documents said.

Blockbuster said that business is continuing as usual with its roughly 3,000 US stores still open, but it said it would evaluate the profitability of its retail locations.

Blockbuster, which employs about 25,000 people, has been closing stores as it grapples with competition from Netflix Coinstar unit Redbox and others that deliver movie rentals digitally.

The company filed its Chapter 11 petition with the US bankruptcy court in Manhattan.

Under the plan, Blockbuster will cut its debt to about $100 million from nearly $1 billion. Blockbuster said more than 80 percent of its senior noteholders have agreed to support the plan and provide $125 million of debtor-in-possession (or DIP) financing to help it operate while in bankruptcy.

Icahn, who sat on the company's board of directors until earlier this year, has input on three of the seven directors for the post-bankrupt company's interim board. He holds about one-third of the senior debt, a source familiar with the matter told Reuters. Hedge funds including Owl Creek Asset Management LP, Monarch Alternative Capital LP, Varde Partners Inc, and Stonehill Institutional Partners LP also will have equity in the restructured company. Blockbuster and store-based rivals like Movie Gallery Inc which filed for bankruptcy in February, have been unable to compete with the success of online and by-mail rental competitors.

Investors have flocked to Netflix, whose shares were trading for $161.72 yesterday morning on Nasdaq, up three percent, while Blockbuster has languished on the pink sheets ahead of the bankruptcy filing.

Blockbuster has started offering more digital delivery and mail-order services as well as express vending kiosks, but has struggled to keep pace as it is burdened by debt.