Northern Rock's two largest shareholders failed yesterday to win the backing of fellow investors for its proposals to limit the powers of the bank's board.

However, one proposal from rebel investors RAB Capital and SRM limiting the board's ability to allot shares with a nominal value of more than £5 million (€6.6 million) won support as part of a show of disapproval against the bank's management.

Speaking after the extraordinary meeting in Newcastle, Bryan Sanderson, Northern Rock chairman, said: "While we are pleased that all but one of the resolutions proposed by SRM and RAB Capital were not carried, we recognise that a material number of shareholders did vote in favour of these resolutions."

A spokesman for RAB was upbeat in spite of the defeat.

"We are pleased with the fact that we have raised the issues - they got a very good airing and the comments made at the meeting were helpful and we are pleased to have got the support of two-thirds of shareholders."

Philip Richards, chief executive of RAB Capital, and Jon Wood of SRM Global had tried to persuade fellow shareholders to back proposals to limit the board's powers. Mr Richards said if Northern Rock were to be nationalised the government would shrink the bank and instead of a "quick fire sale there would be a slow fire sale". He also attacked the handling of the crisis by the Bank of England, which unlike the European Central Bank did not allow covert lending to financial institutions.

SRM and RAB had offered to finance support for a rights issue.

But speaking to reporters after the meeting, Mr Sanderson said Northern Rock would require the support of the Bank of England for two to three years. He said he was still "reasonably confident" that the bank would achieve a private sale and avoid being nationalised by the government.

But Northern Rock shares slumped more than 16 per cent as investors felt nationalisation was still the most likely outcome. The price values the bank at less than £300 million compared with last year's peak of more than £5 billion.

Mr Sanderson said the resolutions proposed by the hedge funds would have curbed the powers of the board in finding a solution. He ruled out any more asset sales following last week's mortgage sale to JPMorgan.

Vince Cable, treasury spokesman for the Liberal Democrats, believes the most likely outcome is a temporary period of public ownership of "several years".

One precedent for this is Continental Illinois, an American lender which found itself in similar difficulties in 1994. After years of incubation under the Federal Deposit Insurance Company, run by the US government, the business was sold on to BankAmerica.