UPDATE 1-Movie Gallery plans to liquidate

* Company, creditors agree liquidation is best

* Movie Gallery filed Chapter 11 bankruptcy in February

NEW YORK, May 10 (Reuters) - Movie Gallery Inc MVGRQ.PK, the operator of the Hollywood Video rental chain, said it plans to close its remaining stores and liquidate its operations.

The decision by the second-largest U.S. video rental company after Blockbuster Inc BBI.N was revealed in a Friday filing with the U.S. bankruptcy court in Richmond, Virginia.

Movie Gallery filed for Chapter 11 bankruptcy protection for the second time in three years on Feb. 3 after sales fell and losses mounted.

The Wilsonville, Oregon-based company initially planned to close just one-third of its 2,415 U.S. stores.

But according to the filing, Movie Gallery decided to close after triggering a default provision under one of its loans.

“It is in the best interests” of the company and creditors that Movie Gallery wind down operations, the filing said.

The filing did not provide a timetable for the liquidation, which requires bankruptcy court approval.

Movie Gallery’s answering service was not accepting messages on Monday and a recorded message said the company is not responding to most media inquiries. A call to a lawyer for the company was not immediately returned.

Video retailers such as Movie Gallery and Blockbuster have suffered as customers switched to Google Inc's GOOG.O YouTube, the Netflix Inc NFLX.O mail-order service and kiosk operators such as Coinstar Inc's CSTR.O Redbox.

Blockbuster said in March it might need to seek bankruptcy to address a roughly $1 billion debt. Its auditor said there was “substantial doubt” about the company’s survival.

Movie Gallery filed for bankruptcy in October 2007 and emerged the following May with private equity firm Sopris Capital Associates LLC and affiliates as its majority equity owner.

But operating losses mounted and revenue last year fell to $1.4 billion from $2 billion in 2008.

Movie Gallery’s bankruptcy filing did not include its Canadian operations. The company has also operated stores under the Movie Gallery and Game Crazy brands.

The case is In re Movie Gallery Inc, U.S. Bankruptcy Court, Eastern District of Virginia, No. 10-30696. (Reporting by Jonathan Stempel; editing by Andre Grenon)