Sept. 17 (Bloomberg) -- The cost of overnight borrowing in pounds rose the most since June as the bailout of U.K. lender Northern Rock Plc stoked concern that more home-loan providers will be forced to seek emergency funding.

The London interbank offered rate that banks charge each other for overnight loans in pounds increased 60 basis points to 6.47 percent today, the highest in more than a month, according to the British Bankers' Association.

A squeeze on lending sparked by losses linked to U.S. subprime mortgages has pushed the gap between three-month rates and the Bank of England's benchmark rate to near the widest in at least two decades, fueling demand for overnight money. Northern Rock required emergency financing from the central bank because it relies on the capital markets rather than deposits for 73 percent of its funds.

``Investors and market players are very worried, especially after Northern Rock,'' said Nathalie Fillet, senior interest- rate strategist at BNP Paribas SA in London. ``A lot of earnings from banks will be coming out soon and that will give us a clearer indication of whether it's a more widespread problem.''

The three-month rate charged by banks for pounds fell 7 basis points to 6.75 percent today, the BBA said. The Bank of England's benchmark rate is 5.75 percent.

A wave of defaults on U.S. home loans to people with poor credit histories has prompted traditional lenders to hold back from providing money to all but the safest borrowers. Banks are also hoarding cash for fear of having to bail out their commercial-paper units, known as conduits.

Shares Drop

Northern Rock, the U.K.'s third-largest home-loan provider, dropped as much as 41 percent in London trading, falling to a seven-year low, as depositors queued to withdraw their savings for a third day. Bradford & Bingley Plc and Alliance & Leicester Plc, which also rely more on financial markets than customer deposits to fund mortgages, extended losses.

Northern Rock last week requested an emergency credit line from the Bank of England, citing a ``severe liquidity squeeze.'' The central bank also lent 3.9 billion pounds ($7.8 billion) in extra money to commercial banks. Restrictions on cash financial institutions need to hold with the central bank were relaxed, to encourage lending.

The overnight rate for dollars rose 17 basis points to 5.30 percent, while the three-month rate fell 5 basis points to 5.60 percent, the BBA said today.

The three-month rate for euros was little changed at 4.73 percent, as overnight costs dropped 11 basis points to 3.57 percent.

``The situation in the interbank market is very serious,'' said Kornelius Purps, a fixed-income strategist at UniCredit in Munich. ``Banks and institutions just aren't willing to lend to each other.''

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Last Updated: September 17, 2007 11:46 EDT