Shares in Northern Rock rose more than 40 percent on Wednesday, as funds built stakes in the stricken mortgage lender, encouraged by new government guarantees that have boosted hopes of a rescue package.

Regulatory filings on Wednesday showed SRM Global, the hedge fund run by influential former UBS trader Jon Wood, had taken an interest of over 4 percent in Northern Rock via derivatives.

The news boosted confidence in the stock, up 31 percent at 1204 GMT to trade at 271 pence, valuing the group at 1.1 billion pounds -- still more than 78 percent below its peak in February.

Today's news is that SRM has built a stake. There are hedge funds willing to build a position, and people reasoning that it's a good time to close out shorts, one London trader said.

The filing showed SRM took the position on Tuesday, after the government threw a new lifeline to the bank, offering to guarantee new retail deposits and extend funding arrangements in a bid to win the bank time to salvage something from its battered business.

Northern Rock, which saw a run on deposits last month after it was forced by the global credit crunch to seek an emergency funding line from the BoE, said the new package would cost it 40 million ($82 million) to 50 million pounds this year -- around 10 percent of its targeted 2007 profit.

But the bank said the new help would buy it time to assess its full range of options, which include being taken over as a whole, being broken up or even attempting to remain independent.

The Newcastle-based mortgage lender declined to comment.

(Additional reporting by Dan Lalor, Dominic Lau and Sitaraman Shankar)

Investment