UK props up wounded Northern Rock

By Steve Slater

LONDON (Reuters) - Britain's financial authorities stepped in to rescue mortgage lender Northern Rock on Friday as the group, which has lent aggressively to home buyers, fell victim to the sharp rise in borrowing costs between banks.

In Britain's biggest casualty of a global financial crisis sparked by U.S. mortgage defaults, customers queued on the streets as they waited to withdraw savings from Northern Rock branches, with some reports of fighting in its north-east England home town of Newcastle.

The British central bank's support -- the first time it has acted as lender of last resort in this way since becoming independent on interest rate policy in 1997 -- puts a prop under Northern Rock, which has been hit by banks' reluctance to lend as they hoard cash to cope with the fallout from bad U.S. loans.

The British government said on Friday it had authorized the Bank of England (BoE) to provide an unspecified amount of liquidity to Northern Rock, which had the biggest share of the new mortgage market in the first half of this year and provides over 730,000 mortgages.

The BoE, which has come under fire from some financial institutions for its hands-off response to market turmoil, said Northern Rock was solvent and only in need of short-term help.

Britain's financial regulator also said Northern Rock met capital requirements and should remain open as usual and analysts said it was not in danger of going bust.

But there were signs of panic among customers and investors, and the bank's shares crashed over 30 percent, one of the biggest falls for a major bank in recent memory.

"You read the headlines in the paper, Northern Rock cash SOS. If you had money in there, what would you do?" said John Duncan, 51, a chartered surveyor who withdrew all his savings from a branch in London.