Apple will start renting movies over the Internet, Chief Executive Steve Jobs said at MacWorld Expo, moving the iPhone and iPod maker into a very competitive market.

SAN FRANCISCO (Reuters) - Apple Inc will start renting movies over the Internet, Chief Executive Steve Jobs said on Tuesday, moving the iPhone and iPod maker into a very competitive market.

Jobs also unveiled a notebook computer that was less than 0.8 inches thick, called the Macbook Air.

With Web movie rentals, Apple takes on DVD-by-mail rental service Netflix Inc, which also allows online viewing, as well as a host of others eager to make it possible to watch movies easily and instantly over the Web.

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Investors who had expected both developments after widespread speculation, sent shares of Apple down more than 5 percent to $169.62 in afternoon trading.

Netflix was down 5.18 percent to $21.59 and Blockbuster Inc., the largest video rental chain, was down 14 percent to $2.78.

Apple has had huge success with its iPod music players and more recently its iPhone communications device. Jobs said iPhone sales had hit 4 million since their release last year, and that the Macbook Air laptop had been eagerly anticipated.

But the Macintosh maker has failed to find a major audience with its Apple TV product, designed for watching Internet video on television.

Apple TV was initially designed to be an iTunes computer accessory, Jobs said. "It's not what people wanted. We learned what people wanted was ... movies, movies movies."

A new version of Apple TV will work with the iTunes movie rental service and support high-definition, he said.

(Reporting by Scott Hillis and Duncan Martell; Editing by Andre Grenon, Toni Reinhold)

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