UPDATE 2-Movie Gallery to close 520 underperforming stores

(Adds analyst comment, share move updates)

LOS ANGELES, Sept 25 (Reuters) - Movie Gallery Inc MOVI.O, the debt-plagued U.S. movie rental company, said on Tuesday it plans to close about 520 underperforming and unprofitable Movie Gallery and Hollywood Video stores in an effort to save cash and cut costs.

Shares of Movie Gallery, the No. 2 U.S. film rental company after Blockbuster Inc BBI.N, jumped 14 percent, while online movie rental service Netflix Inc (NFLX.O) rose 9 percent on expectations it would pick up business from closed stores in rural and other areas without competition.

Movie Gallery has retained Great American Group, a professional services firm, to help sell off inventory at the closing stores, the company said in a statement.

The closures represent 13 percent of the total chain of nearly 4,000 stores. No job loss figures were available, a company spokesman said.

"Netflix would probably tend to benefit to a larger degree than Blockbuster from the Movie Gallery news, due particularly to the fact that these stores tended not to be in big metro areas, which is Blockbuster's forte. There is a better probability that these customers would move online to get their videos," said Jefferies and Co analyst Youssef Squali.

Netflix shares have fallen over 30 percent in the past year as the company has slashed prices and suffered its first quarterly drop in subscriptions while engaged in a fierce battle for market share with Blockbuster.

Movie Gallery Chairman and Chief Executive Joe Malugen said employees at the affected stores have been notified, and that customer accounts would be transferred to the nearest stores.

Movie Gallery has been floundering under a debt load of $1.1 billion since 2005, when it took over larger competitor Hollywood Video and in-store rental revenue began falling industrywide as a result of competition from online rentals.

The company has obtained forbearance agreements through Sept. 30 from its largest lenders.

Shares of Movie Gallery rose 7 cents to 58 cents on Nasdaq, while Blockbuster was up 4 cents to $5.41 on the New York Stock Exchange, and Netflix jumped $1.72, or 9 percent, to $21.01 on Nasdaq. (Reporting by Gina Keating and Sue Zeidler in Los Angeles; Deepti Chaudhary in Bangalore, editing by Derek Caney/Jeffrey Benkoe)