Private equity bidder Olivant yesterday pulled out of plans to rescue stricken British bank Northern Rock.

The company, led by Luqman Arnold, the former chief executive of Abbey National, was due to submit its proposal for the bank to the UK government yesterday afternoon.

However the company, which had been working on its bid over the weekend, said it had decided not to submit a further proposal in relation to Northern Rock.

This leaves just two proposals on the table - one from a consortium led by Virgin and the other from the company's management team led by non-executive director Paul Thompson.

Nationalisation is still on the table if a deal cannot be done. Northern Rock has borrowed about £24 billion (€32 billion) from the Bank of England since September to finance its lending.

Mr Arnold, Olivant chief executive, said: "Despite working intensively, we have been unable to formulate a value-creation proposal which meets our investment criteria whilst also respecting HM government's proposed financing terms and the interests of other stakeholders in the company."

Olivant's proposal had attracted the support of shareholders including SRM and RAB, the two hedge funds that own 18 per cent of Northern Rock. They may now switch their allegiance to the company's management plan.

The company's standalone proposal has been gaining support from investors in recent days - shareholders have indicated they would be prepared to put in £400 million for a rights issue.

Virgin's proposal involves injecting the most equity - about £1.3 billion - to help recapitalise Northern Rock, which has 26,000 account-holders in the Republic.

Virgin plans to rebrand Northern Rock as Virgin Bank and fold in its Virgin money unit, valued at £250 million.

"We have made a proposal that seeks to stabilise the company and rebuild it as a trusted and thriving institution under the Virgin brand with a long-term future," Virgin Bank chairman Brian Pitman said in a statement.

One person close to the situation said Virgin's proposal was likely to appeal to the tripartite authorities because it overcapitalised Northern Rock. However, it has not been popular with shareholders, who face being diluted to hold 45 per cent of the company.

The company's own restructuring proposal is seen to be highly conservative in terms of new mortgage lending. It proposes shrinking Northern Rock's loan book and balance sheet - "taking it back two or three years in time", in the words of one person.

This would have the benefit of paying back the government faster and meaning the government guarantee would be needed for a shorter period.

Northern Rock shares, which rose above £1 earlier in the session, fell 1½p or 1.6 per cent to close at 94½p.

- ( Financial Timesservice/Bloomberg)