Sources: Deal thought to hamper competition.

WASHINGTON (Reuters) - Staff of the U.S. Federal Trade Commission plan to recommend that the agency block Blockbuster Inc.'s hostile bid to buy Hollywood Entertainment Corp., sources close to the case said on Wednesday. The FTC's competition bureau has concluded that the deal combining the two largest video rental chains would hobble competition, the sources said.

Hollywood has rejected Blockbuster's offer and has agreed to be bought by Movie Gallery Inc., a deal the FTC has already approved.

Hollywood is a distant second to Blockbuster in the movie rental business. Movie Gallery is No. 3.

FTC staff are expected to make a formal recommendation to the agency's five commissioners within several days on the Blockbuster bid for Hollywood. Antitrust enforcers at the FTC have agreed with Blockbuster to make a decision by March 21 on whether they will oppose the combination of the two companies.

Hollywood has said Blockbuster's offer raises "significant antitrust issues that cause substantial uncertainty as to whether the transaction would be allowed to proceed."

In meetings with the FTC, lawyers for Blockbuster have argued that the deal would not hurt competition because the rental chains compete with retailing giant Wal-Mart Stores Inc. and others who sell discounted videos, the sources said.

However, that argument has failed to win over antitrust staff at the agency, according to these sources.

The agency will not issue a formal recommendation until it finishes studying some last-minute information on video rental rates that the companies have provided, according to one source. But it is "highly unlikely" the data will reverse the staff's opposition, this source said.