The plan had been to combine content and technology under one roof, but Blockbuster have pulled the plug on the $1bn deal, saying in a statement "It is not in the best interests of Blockbuster's shareholders to proceed with an acquisition of Circuit City".
Circuit City recently reported a loss of £165m in its first fiscal quarter, up $110m on last year's loss.
However, US city observers had also doubted Blockbuster's ability to come up with the $1bn needed to complete the deal. The chain has lost significant amounts of money in recent years as the competition from online rental firms, with their low overheads, hots up.