UPDATE 2-Blockbuster cuts size of Viacom letters of credit

* Letters of credit for Viacom cut to $25 mln from $75 mln

* Blockbuster shares up more than 37 pct

* Analysts cite improved credit outlook (Adds analyst comment, updates shares)

SAN FRANCISCO/NEW YORK, Sept 2 (Reuters) - Shares in Blockbuster Inc BBI.N jumped more than 37 percent on Wednesday after it reduced the size of its letters of credit for Viacom Inc VIAb.N by about two-thirds, or $50 million, a move analysts said signals an improving credit outlook.

Blockbuster said it reduced the value of the letters of credit for Viacom, its former parent, to about $25 million from about $75 million. The letters of credit are maintained by Blockbuster for Viacom's benefit to cover Viacom's potential liability under existing Blockbuster store leases in place prior to Blockbuster's 1999 initial public offering.

Since 2004, many of those leases have been renegotiated or renewed.

Analysts said the news encouraged the view that Blockbuster could emerge from the credit crisis.

"The reduction is greater than the $25 million target the company had earlier highlighted and will further improve liquidity," Deutsche Bank analyst Karru Martinson said in a note to clients.

The announcement came less than a week after Blockbuster said it sold Xtra-vision Ltd, its 186-store entertainment retailer in Ireland, for up to $45 million in cash. At that time it said it expected to use a majority of the proceeds from the sale for incremental liquidity.

"We are pleased to have reached this agreement with Viacom, which delivers on our promise to improve liquidity through a number of initiatives," said Jim Keyes, Blockbuster chairman and chief executive.

Shares of Blockbuster were up 34 cents, or 37.4 percent, at $1.25 in late afternoon trade on the New York Stock Exchange after jumping as high as $1.34 in the session. (Reporting by Franklin Paul and Clare Baldwin in San Francisco; Editing by Gerald E. McCormick, Gary Hill)