The British government deepened its involvement in Northern Rock on Tuesday, offering to guarantee more of the stricken mortgage bank's liabilities as it battles to find a private-sector buyer.

Facing growing speculation it could be forced to nationalize the country's fifth-largest mortgage lender, the government extended its guarantees to include virtually all Northern Rock's senior debt obligations, a move aimed at providing stability and at protecting the bank's credit ratings.

A ratings downgrade would further unsettle financing arrangements and would delay an already protracted sale.

The auction process for Northern Rock, Britain's highest- profile casualty of the credit crisis, has been thrown into doubt in recent weeks, but at least two high-profile suitors remain, including preferred bidder Virgin.

Tuesday's guarantees -- which add to existing guarantees for retail deposits and some obligations -- mean only subordinated and hybrid debt is left uncovered, stoking concerns over the rising cost to the taxpayer of shielding bank depositors and investors.

A Treasury official, however, estimated the new guarantees would cover just hundreds of millions of pounds of debt. The Treasury also said Northern Rock would pay an appropriate fee.

Northern Rock has already borrowed around 25 billion pounds ($50 billion) from the Bank of England since September.

Analysts said the additional guarantees demonstrated the government's commitment to a private sector solution for the Northern Rock debacle, rather than full-scale nationalization -- something the government has consistently argued, against growing criticism and speculation.


The previous announcements have created guarantee arrangements for all unsecured retail products of Northern Rock Plc and many of its wholesale deposits and borrowings, the finance ministry said.

This announcement extends these arrangements to a wider range of wholesale products.

The government said it now covered all wholesale deposits, payment obligations on derivatives, payment under collateralized and covered bonds that exceeds the underlying collateral and, finally, any obligation to repurchase mortgages under its Granite securitization program for breach of certain conditions.

The government said its guarantees would remain in place during the current instability in financial markets, adding it would give at least three months' notice before dropping that cover.

Northern Rock's volatile shares were up 2.8 percent at 0928 GMT at 94p, valuing the bank at just under 400 million pounds.

Northern Rock's top shareholder SRM said on Tuesday it had nudged up its stake in the lender to 9.5 percent.

Credit default swaps in Northern Rock are unchanged at 255 basis points, according to Deutsche Bank prices.

(Additional reporting by Sumeet Desai and Mark Potter; Editing by Andrew Callus and Erica Billingham)