Universal Pictures is teaming with Jason Blum’s red-hot Blumhouse Prods. banner on “Mercy,” a fantasy-horror movie based on Stephen King’s short story “Gramma,” published as part of his 1985 collection “Skeleton Crew.”Peter Cornwell (“The Haunting in Connecticut”) will direct from a script by Matt Greenberg (“1408″), and Frances O’Connor (“A.I.”) is set to star. Story follows two young boys who go with their single mother (O’Connor) to take care of their elderly, senile grandmother named Mercy, only to discover that she’s a witch who made a pact with a dark force many years before. Blum, who had two horror pics among the top 10 at the box office last weekend in “Paranormal Activity 4″ and “Sinister,” will produce the movie with McG and Mary Viola of Wonderland Sound and Vision. In June 2011 Blum and his company signed a three-year, first-look deal with Universal to bring low-budget genre pics to the studio. King’s story was previously adapted as an episode of “The New Twilight Zone” in 1986, with Harlan Ellison writing the script and “Carrie” star Piper Laurie providing some of the voiceover for the character of Gramma/Mercy. Cornwell’s 2009 horror pic “Haunting in Connecticut” grossed $77 million worldwide and launched a Gold Circle Films franchise that also includes “The Haunting in Georgia” and planned sequel “The Haunting in New York.” He’s repped by ICM Partners, Gotham Group and Felker Toczek Gellman Suddleson. Greenberg, who wrote “Halloween H20,” the King adaptation “1408″ and Paramount’s upcoming “Pet Sematary” remake, is repped by UTA, Magnolia Entertainment and attorney Jason Sloane. O’Connor, who starred in Steven Spielberg’s “A.I.” and ABC’s “Cashmere Mafia,” was recently seen opposite Willem Dafoe in “The Hunter.” She’ll soon be seen in Billy Bob Thornton’s pic “Jayne Mansfield’s Car” and Francesca Gregorini’s indie drama “Emanuel and the Truth About Fishes.” She’s repped by the Gersh Agency and manager Rob Marsala of Wishlab. CAA reps Blum, while McG is repped by WME, Management 360 and attorney David Weber. Paradigm reps King.