San Francisco ? Wal-Mart Stores Inc. is turning over its online DVD rental business to Netflix Inc., signaling that the largest retailer couldn’t beat the Internet upstart at its own game.

Under the agreement announced Thursday, Wal-Mart will offer its existing online DVD rental customers the chance to continue their subscriptions with Los Gatos, Calif.-based Netflix at their current price for the next year. Wal-Mart also will begin promoting the Netflix service on its Web site.

In return, Netflix’s Web site will remind its subscribers that they can buy DVDs from Walmart.com.

The companies didn’t disclose how many customers Netflix will inherit nor the financial terms of their partnership.

Netflix still expects to lose between $5 million and $15 million this year as it tries to thwart Blockbuster Entertainment Inc.’s aggressive push into online DVD rentals, but getting Wal-Mart to drop out of the competition represents a major victory for the tiny company.

It takes Wal-Mart less than a day to surpass Netflix’s 2004 sales of $506 million.

Despite its size and merchandising savvy, Bentonville, Ark.-based Wal-Mart couldn’t overcome Netflix’s head start in the rapidly expanding niche of online DVD rentals.

Formed in 1999, Netflix already has attracted 3 million subscribers and shaken up the home entertainment industry by establishing a new way to rent DVDs.

The Netflix service, which costs $17.99 per month, requires subscribers to create an online wish list from a library consisting of more than 40,000 titles and then delivers up the DVDs through the mail.

Netflix allows subscribers to keep up to three DVDs for an unlimited amount of time without late fees. Once a DVD is returned in postage-paid envelope, Netflix sends out the next selection on the subscriber’s online list.

The concept caught fire as more households bought DVD players and surfed the Internet, inspiring Wal-Mart to introduce a copycat service more than two years ago.

After initially deriding Netflix as a passing fancy, Blockbuster is investing heavily in an online rental service that costs $3 per month less than Netflix.

Dallas-based Blockbuster has budgeted $170 million for its online expansion and underscored its resolve to win back customers by dropping the late fees that inspired Netflix to launch its alternative approach. Eliminating the late fees reduced Blockbuster’s first-quarter revenue by $145 million.

Blockbuster expects to have 1 million online customers by next month, but its long-delayed response to Netflix’s increasing popularity irritated many shareholders. The angst sparked a rebellion by the company’s largest shareholder, billionaire Carl Icahn, who last week won a battle to win three seats on Blockbuster’s seven-member board.

Meanwhile, Netflix is aiming to add an additional 1 million subscribers by the end of the year.

The cutthroat competition has battered Netflix’s stock, which has plunged from a high of $39.77 reached early last year. The company’s shares closed Wednesday at $15.50 on the Nasdaq Stock Market.