A bankruptcy auction for movie rental chain Blockbuster Inc kicked off with a $284 million bid from Dish Network Corp on Tuesday, quickly topped by bids from rival groups led by billionaire Carl Icahn and hedge fund Monarch Alternative Capital

The auction in U.S. Bankruptcy Court in Manhattan will decide the fate of the movie rental chain, which filed for bankruptcy last September. The company put itself up for sale in February after a reorganization plan fell apart.

The Icahn group bid $291.4 million, while Cobalt Video, a group of hedge funds led by Monarch, offered $290 million, said Blockbuster lawyer Stephen Karotkin, who was leading the auction. The Cobalt bid includes more money for repaying certain noteholders, he said.

The auction, expected to continue throughout the day, will determine whether Blockbuster stays in business or shutters its 1,700 remaining stores.

Once the biggest movie rental chain, the company foundered on intense competition from mail-order and digital competitors such as Netflix Inc.

The next owner could preserve Dallas-based Blockbuster as an ongoing business, though bidders also have the option of liquidating the company. Proceeds of the sale will become part of the bankruptcy estate.

The other qualifying bidders were SK Telecom Co and a team including liquidators Gordon Brothers Group and Hilco Merchant Resources, said Karotkin, of law firm Weil Gotshal.

The Icahn group includes liquidator Great American Corp and other parties. Activist investor Icahn, a large holder of Blockbuster senior debt, has long been interested in the company.

Preliminary talks leading up to the bidding were held on Monday, with attorneys and investment bankers refining their bids leading up to Tuesday's auction.

(Reporting by Dena Aubin in New York; Writing by Martha Graybow and Jonathan Stempel; Editing by Lisa Von Ahn and John Wallace)

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