Shares in embattled British bank Northern Rock tumbled 20 percent to an all-time low on Wednesday as speculation of a cut-price takeover bid combined with stake sales from two investors stoked concerns over its future.

The bank, seen as a probable takeover target since being engulfed by a funding and customer confidence crisis on Friday, may also struggle to attract a suitor given damage to its brand, tough capital markets and the stated aims of potential buyers to diversify away from UK mortgages, industry sources said.

By 7:00 a.m. the shares were down 8 percent at 281.5 pence, having hit 246.25 pence, the lowest level since the bank floated almost exactly 10 years ago. The fall valued the bank at just over 1 billion pounds, from over 5 billion earlier this year.

A crisis at the bank was sparked on Friday when the Bank of England stepped in with an emergency funding facility, after it was unable to raise funds in wholesale markets.

The latest leg down by its shares was blamed on talk of opportunistic cut-price bids for the bank from UK rivals Lloyds TSB, HBOS or HSBC. A bid could be pitched at 200p a share or lower, according to dealers.

Industry sources said all three are likely to have little appetite for a deal, however.

There were a lot of people expecting an announcement within days saying Northern Rock had three or four people looking at it or the Bank of England had come up with some agreement that the bank would carve itself up and sell itself out in a series of portfolios. But there's been no news, and no sign of news, one industry source said.

Lloyds held talks to mount a rescue of its rival, but a deal was blocked by the BoE and Financial Services Authority, industry sources have said. Lloyds is midway through its own recovery plan and is unlikely to be willing to take on the risks of financing Northern Rock's funding book, sources said.

HBOS, the biggest UK mortgage provider with a 20 percent share, has in recent years made clear its intention to diversify into other areas.

HSBC is one of the world's best capitalized banks and could easily afford a deal, but has repeatedly said its focus is on expanding in Asia and other emerging markets and is under fire from a U.S. activist investor to accelerate that strategy.

Lloyds, HBOS, HSBC and Northern Rock all declined to comment.

Two of Northern Rock's major shareholders also cut their stakes, indicating they have little confidence that a takeover is near.

Baillie Gifford, the bank's top shareholder, cut its stake of almost 6 percent to below 5 percent and Lloyds TSB trimmed its holding to just below 4 percent.

OPTIONS

Northern Rock said on Monday it was not in takeover talks but would explore strategic options.

Options include a sale of all or parts of the business, running the mortgage book down or trying to stay independent.

It is true the Bank of England will not stay permanently behind Northern Rock. As a result, the board needs to find a solution -- sooner rather than later -- to address the future of the company as a standalone or as part of another group, said Mamoun Tazi, analyst at MF Global.

The brand may have been irreparably damaged, said Richard Hunter, head of UK equities at stockbroker Hargreaves Lansdown. He said the best option would appear to be a buyer to pick them up at a knock-down price.

Admittedly it would have to be an institution at this point in time with a pretty sturdy constitution, Hunter added.

Northern Rock's shares had climbed in early trading, adding to a rebound on Tuesday amid optimism that a big cut in U.S. interest rates would rescue capital markets and signs that a run on the bank by savings customers had faded.

Thousands of customers withdrew savings in the days after the BoE's rescue. Up to 2.5 billion pounds is estimated to have been withdrawn by retail customers, according to industry sources, but the pace of withdrawals slowed sharply on Tuesday after the government guaranteed savings were safe.

Oriel Securities said Northern Rock's shares are already near its minimum estimated standalone run-off value.

We value cashflow from operations at 91 pence per share and the present value of capital releases at a further 142 pence per share, making a total of 233p, Oriel said in a note.

(Additional reporting by Dominic Lau and Sitaraman Shankar)

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