NEW YORK (Reuters) - Circuit City Stores Inc, the No. 2 U.S. consumer electronics retailer, filed for bankruptcy protection on Monday just a few weeks before the start of the key holiday shopping season, becoming the largest retailer to file under Chapter 11 this year.

Circuit City fell victim to tighter credit terms from vendors and a loss of market share to Best Buy Co, Wal-Mart Stores Inc and other rivals.

The retailer and 17 affiliates filed for Chapter 11 protection from creditors with the U.S. bankruptcy court in Richmond, Virginia, where it is based.

Circuit City filed one week after saying it would close 155 stores, or more than one-fifth of its retail base, and eliminate 17 percent of its U.S. workforce. It also said it was considering all options to restructure.

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In a court filing on Monday, Chief Financial Officer Bruce Besanko said the retailer filed for Chapter 11 in order to continue its turnaround efforts.

"In large part, a Chapter 11 filing is due to three factors, all of which contributed to a liquidity crisis that prevented the company from completing its turnaround goals outside of formal proceedings: erosion of vendor confidence, decreased liquidity and a global economic crisis," Besanko said.

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Circuit City had lost money in five of the last six quarters. In recent weeks, suppliers pinched by the global credit crunch have tightened terms, sometimes requiring up-front payments before shipping goods.

Larger rival Best Buy, which is based in Minneapolis, has said it might take over stores that distressed rivals close.

Yet a flood of discounted merchandise from liquidating Circuit City stores could hurt Best Buy during this holiday shopping season, said Jefferies & Co analyst Dan Binder.

"Longer term, you've got Best Buy, who's dominant in the sector, taking share. But in the short run it could feel the pain of the liquidation activity," Binder said.

"There's already soft demand out there and probably too much supply. This exacerbates the situation," he added.

According to the filing, Circuit City had $3.4 billion of assets and $2.32 billion of debt as of August 31, and more than 100,000 creditors.

The company has arranged a commitment for debtor-in-possession financing of $1.1 billion, which will allow it to continue to operate during the bankruptcy proceeding.

Among the company's largest unsecured creditors are Hewlett-Packard Co, Samsung Electronics Co and Sony Corp, the filing shows. The largest shareholders include HBK Master Fund LP and First Pacific Advisors LLC, according to the filing.

Shares of Circuit City last traded Friday at 25 cents, New York Stock Exchange data shows. They fell to 13 cents in premarket trading.

(Reporting by Jonathan Stempel and Martinne Geller; Editing by Steve Orlofsky and Brian Moss)

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