Erol's Inc., which over the past decade has become synonymous with videotape rentals in the Washington area, agreed yesterday to be taken over by its largest competitor, national video giant Blockbuster Entertainment Corp., bringing one of the toughest local retailing battles in memory to a dramatic end.

Blockbuster, which arrived in the Washington market less than two years ago to challenge Erol's, said it agreed to acquire the Springfield-based company for $40 million, although Erol's owner Erol Onaran likely will get less than that because not all of the payment is in cash.

Over the next few months, most Erol's stores will become Blockbuster locations and others will close. Erol's membership cards also will be converted to Blockbuster memberships, company officials said, and the stores will operate under Blockbuster's basic rental policy of $3 for three nights.

While industry analysts said customers were likely to benefit from Blockbuster's wider selection of tapes, others suggested that Blockbuster might eventually use its newly dominant position in the Washington market to raise its rental rates. The Maryland attorney general said his office would look into the planned takeover for possible antitrust violations.

The addition of Erol's 208 stores (108 of them in the Washington area) to Blockbuster's roster of 1,500 stores (30 of them local) will cement the fast-growing Fort Lauderdale, Fla.-based company's position as the nation's largest video-rental chain -- a title it wrested from Erol's just a couple of years ago. Blockbuster has $1.25 billion in annual sales, while Erol's has $132.9 million, according to industry estimates.

"Basically it's a market share buy," Frank Moldstad, editor of Video Store magazine, a trade publication, said of Blockbuster's planned acquisition of Erol's. "Boom, they own Washington."

But Blockbuster will hardly have a monopoly here. Several hundred local stores -- ranging from mom and pop operations to branches of national chains to convenience stores like 7-Elevens -- rent video tapes, and hundreds of other stores sell them. Some industry officials said the deal might help independent video stores and small chains by freeing them from the competitive cross-fire between the two big chains.

Onaran, 56, who founded Erol's as a television repair shop in 1963 after emigrating from Turkey to the United States with $16 in his pocket, as legend has it, was not available for comment yesterday.

Onaran owns 97 percent of Erol's -- an employee stock ownership plan has the rest. He will serve as a consultant to Blockbuster for several months and then retire to pursue other interests, according to Erol's Vice Chairman Margaret A. Chittal.

Blockbuster said it expected to retain as many of Erol's 2,600 employees as possible. But industry sources said it was less certain that Blockbuster would retain much of Erol's 200-person headquarters and warehouse staff, much of which will become redundant under the new owners.

The deal is the latest evidence of an ongoing shakeout in the video-rental industry, which is grappling with a slowdown in growth now that purchases of videocassette recorders have leveled off and the prices of videotapes for sale have become more affordable.

"It's no secret there's a major consolidation going on in this industry, so growth through acquisition of weakened competitors is I don't think anything necessarily surprising," said Miriam Meglan, an Alexandria-based industry analyst for Johnson, Rice & Co., a New Orleans brokerage. "The smaller players are slugging it out with these bigger guys for a share of the market that isn't growing as fast as it used to."

Erol's, the nation's third-largest video renter behind Blockbuster and Philadelphia-based West Coast Video, had been rumored in recent months to be having financial difficulties because of overexpansion and competition from Blockbuster. A steady stream of key executives had departed Erol's over the past few months, and Onaran recently had begun hinting that he was seeking a buyer for the firm.

Industry observers said the planned takeover gives Blockbuster a de facto victory in the two-year battle for dominance of the Washington market.

Blockbuster's arrival in the Washington market put competitive pressure on Erol's unlike any the local company had seen in the years it had dominated the local video rental business, industry officials and analysts said. Erol's had grown from a handful of stores to more than 200 in less than 10 years, and was renting about 35 million tapes a year. In addition to the Washington market, Erol's has stores in the Baltimore, Philadelphia, Cleveland, Chicago, Richmond and Tidewater Virginia areas.

Erol's growth came to a sudden halt when Blockbuster came to town. Blockbuster raided Erol's for executive talent, opened stores near Erol's locations and offered customers free memberships in its rental club. Erol's, in response, dropped its membership fees, spruced up its stores and stepped up its marketing efforts to attempt to blunt the challenge. But analysts said Erol's bloated management structure and financial limitations compared with Blockbuster's savvy Wall Street financing left the Springfield company struggling.

Officials from Blockbuster and Erol's declined to break down the $40 million sales price, so it was unclear how much of it was debt, stock or cash. The $40 million figure includes debt on Erol's books that Blockbuster will take on.