Government offers Northern Rock guarantee

Ministers have taken dramatic action in an attempt to end the crisis at Northern Rock.

Chancellor Alistair Darling has announced the Government will guarantee all deposits with the bank.

Speaking at the Treasury after talks with US Treasury Secretary Henry Paulson, Mr Darling sought to reassure investors that the bank would remain solvent.

But he added: "Should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets."

However it is not only savers who've lost faith in Northern Rock. In the City, its shares are down nearly a third and £1.32 billion has been wiped off its stock market value.

Bradford & Bingley and the Alliance and Leicester also saw their value hit as concerns spread that the financial squeeze behind Northern Rock's crisis wasn't exclusive to the Newcastle-based bank.

Anxious Northern Rock customers, some of whom began queuing as early as 4am on Monday, are thought to have withdrawn around £2 billion since it confirmed it had secured emergency Bank of England funding.

Some banking analysts also claimed as much as £12 billion could be moved away from the bank during the coming days as a result of the current problems, representing around half of the group's savings balances.

Meanwhile, both Northern Rock and industry commentators continue to insist there is no need to panic.

A Northern Rock spokesman said: "We understand that customers are concerned but mortgages and savings are safe."

He added: "The Financial Services Authority, the Bank of England and the Treasury are all confident that Northern Rock is solvent and holds more capital than it is required to."

Chancellor Alistair Darling earlier reiterated assurances to Northern Rock depositors that their money is safe.

Mr Darling said that in the longer term he would like to see more fixed-rate mortgages to protect people from the ups and downs of the financial markets.

Attempts to secure a rescue takeover bid for the crisis-struck mortgage-lender received a boost last night after the Bank of England confirmed its emergency loan would be available post sale.

A Bank source said it had been agreed that a successful bidder would be able to use the facility for the rest of its existing term, but declined to say how long that would be.

Sources suggest that an earlier attempt by Lloyds TSB to mount a rescue bid had been blocked by regulators and the BoE.

HSBC and HBOS are among the names being discussed by market watchers as potential suitors.

Experts are now predicting that the name of Northern Rock will cease to exist in 12 months time, with some saying a buy-out will come sooner rather than later.

One option, said to be being considered by the Bank of England is breaking up the lender's mortgage book and selling it off piecemeal to a number of bidders.

Further talks between the Bank of England, the FSA and the Treasury are expected to resume later to discuss the way forward for the bank.

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