Sept. 19 (Bloomberg) -- Northern Rock Plc dropped in London trading on speculation the bank may be acquired for less than its market value following the bailout by the Bank of England.

Shares of the bank fell 49 pence, or 16 percent, to 257 pence, valuing the company at 1.08 billion pounds ($2.2 billion). The Dow Jones Stoxx 600 Banks Index added 3.7 percent.

There are ``rumors of a heavily discounted bid in the offing for Northern Rock,'' said Jamie Coleman, who helps oversee $600 million at EFG Wealth Management in London. ``Nothing's been confirmed. Nonetheless, the only way someone is going to take the Rock out is with a seriously low offer.''

Northern Rock sought emergency funding from the Bank of England last week, the biggest bailout of a British bank in 30 years, after rising credit costs left the mortgage lender unable to make new loans. The Newcastle, England-based bank's shares have dropped 54 percent since it received the help.

Northern Rock is the most vulnerable U.K. bank to higher interest rates because capital markets account for 73 percent of its funding. The gap between the rate financial institutions pay to borrow pounds for three months and the Bank of England's benchmark, currently at 5.75 percent, is near the widest in at least two decades, fueled by the collapse in subprime mortgages in the U.S.

The Bank of England said today it will lend 10 billion pounds to commercial banks in an emergency three-month auction and widen the range of securities it accepts as collateral.

Shareholders Quit

Northern Rock shares have been hurt ``by a rumor that any bid is more likely to be around 200 pence,'' Martin Slaney, head of spread betting at GFT Global Markets in London, wrote in an e-mail. ``Further pressure has come from rumors that major shareholders are cutting their stakes.''

Baillie Gifford & Co., the closely held Scottish money manager that ranked as Northern Rock's biggest shareholder as recently as last week, sold its stake in the British bank, said a person with knowledge of the decision who declined to be identified. Edinburgh-based Baillie Gifford had about 25 million shares, or 5.98 percent of the bank, before cutting its stake on Sept. 17, Northern Rock said in a statement today.

Lloyds TSB Group Plc, which cut its stake in Northern Rock to less than 4 percent on Sept. 17, declined to comment on whether it's interested in Northern Rock, said spokeswoman Mary Walsh.

HBOS Plc also declined to comment. ``We never comment on market rumor and speculation,'' spokesman Mark Hemingway said.

``Investors should be braced for continued volatility in the share price as the uncertainty persists,'' Slaney said. ``The longer we go without a bid, the lower that bid is likely to be.''

Northern Rock, whose roots date back to 1850, is the U.K.'s third-biggest lender by gross mortgages with loans worth 17.4 billion pounds as of June 30.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: September 19, 2007 11:46 EDT