Blockbuster Inc's future was at stake on Tuesday as billionaire investor Carl Icahn squared off against Dish Network Corp and two other suitors at a bankruptcy auction to decide the movie rental chain's next owner.

The showdown prompted Icahn, the activist investor and an owner of a large amount of Blockbuster senior debt, to show up in person at the auction in federal bankruptcy court in Manhattan, taking a front row seat in a packed courtroom.

Bidding for the world's largest movie rental chain reached $310 million by late Tuesday afternoon, up from an earlier $284 million bid from Dish, the satellite television company.

The auction also attracted a bid from Cobalt Video, a group of hedge funds led by Monarch Alternative Capital LP.

A fourth bidder, South Korea's SK Telecom Co, dropped out when Blockbuster rejected its offer as inadequate. A fifth prospective suitor, liquidators Gordon Brothers Group and Hilco Merchant Resources, decided not to take part.

Bidding was expected to continue into Tuesday night.

Blockbuster, which once had a market value topping $5 billion, filed for Chapter 11 protection from creditors last September after years of foundering under intense competition from mail-order and digital rivals such as Netflix Inc.

The Dallas-based company put itself up for sale in February after a reorganization plan fell apart.

Whoever wins control could decide to keep Blockbuster in business, or liquidate the company and close 1,700 stores. An additional 700 stores are already slated for closing and not part of the auction.

Sale proceeds would go toward the bankruptcy estate.

The Icahn group includes liquidator Great American Corp and others. Once Blockbuster's largest shareholder, Icahn had led a hedge fund group that proposed a reorganization plan to give them control in exchange for their debt.

Meanwhile, Dish Chief Executive Charlie Ergen might find Blockbuster's online content appealing as he could use as a base for an online product to deliver movies.

SK dropped out of the bidding after Blockbuster rejected an argument by David Feldman, a lawyer for SK, that the company's distribution agreements with the Fox, Sony and Universal movie studios would add value and help Blockbuster stay in business.

Feldman said at the auction he would be reserving rights on behalf of his client following the rejection.

The Monarch-led group submitted a $290 million stalking horse bid in February intended to set a floor for bids at an auction.

The case is In re: Blockbuster Inc, U.S. Bankruptcy Court, Southern District of New York, No. 10-14997.

(Reporting by Dena Aubin in New York; additional reporting by Tom Hals; writing by Martha Graybow and Jonathan Stempel; editing by Lisa Von Ahn, John Wallace and Andre Grenon)