WASHINGTON — Wal-Mart Stores said Thursday that it will pull the plug on its online DVD rental service and refer its existing subscribers to Netflix. The retail giant will continue to promote Netflix on the DVD sales area of its Web site, Walmart.com.

In exchange, Netflix said it would promote DVD sales through Wal-Mart on its Web site and on the mailers it sends to subscribers.

The news lit a rocket under Netflix’s stock, sending shares up 20% in early-morning trading before falling back to close up 4% at $16.13.

Netflix execs cautioned that they did not expect the deal to have a significant short-term impact on the company’s financial performance or subscriber count.

In a statement issued in conjunction with the announcement, Netflix said it was not revising its 2005 earnings guidance as a result of the deal.

Although Wal-Mart has never disclosed its subscriber count, analysts estimate it has fewer than 100,000 online rental customers.

Still, the news capped a good week for Netflix, which also saw its No. 1 rival, Blockbuster, start testing a higher price point for its online rental service.

Blockbuster’s current base price is $14.99 a month for three movies out at a time. That’s $3 lower than Netflix’s base price.

On Wednesday, Blockbuster officials confirmed the chain had begun testing consumer response to a $17.99 offer in select markets.

An ongoing price war between Netflix and Blockbuster has slashed profits at both companies.

As a result of the Wal-Mart announcement, Blockbuster said Thursday that it would give any Wal-Mart or Netflix sub who transferred to Blockbuster’s online service two free months of rentals, a free DVD and a continuation of their current subscription price for 12 months.

Blockbuster’s management has been under pressure from the company’s largest shareholder, Carl Icahn, to rein in spending and boost cash flow.

(Paul Sweeting is a reporter for Daily Variety sister publication Video Business.)