Northern Rock has effectively shut down its UK sub-prime mortgage business, as the shares added almost 5 per cent amid bid talk.

The UK mortgage lender, heavily exposed to trubulent wholesale credit markets, was last week the subject of talk that it would have to issue a second profit warning. It has now hiked interest rates on its fixed-rate loans for future borrowers by up to 1.25 per cent and scrapped its tracker range.

Ray Boulger, technical director at John Charcol, the mortgage broker, said: "By putting their rates up to this level, Northern Rock have taken themselves out of the market. But by keeping some rates there, albeit ones people won’t want, they’re giving themselves the option to come back in at a later stage."

News of Northern Rock's sub-prime exit made it the biggest FTSE-100 gainer in afternoon trading, sending it up 4.6 per cent or 33.5p at 761.5p. It has fallen heavily since a February profit warning on fears that credit market turmoil would force it to issue a second warning on earnings.

It has now gone so low that some analysts believe it is ripe for a takeover. ING has played down any talk it is interested, but HSBC is also seen as a potential bidder.

Yesterday, Northern Rock attempted to calm investors' fears with a statement to the stockmarket that revealed it had £275 million invested in US residential mortgage-backed securities and collateralised debt obligations (CDOs).

Northern Rock's retreat from credit-adverse mortgages follows similar moves from specialist sub-prime lenders in the UK.

The UK's biggest specialist sub-prime lender, GMAC-RFC, has raised rates while Platform, an arm of Brittania building society, is considering taking similar action.

Last week, Edeus and Mortgages Plc, which are backed by Merrill Lynch, also raised rates on their sub-prime mortgages. Mortgages, Infinity Mortgages and Unity Homeloans, bowed out of the market earlier this month.

Sandy Chen, an analyst at Panmure Gordon, said Northern Rock's UK mortgage business had been affected by Lehman Brother's decision to close its US sub-prime business. "By doing this, Northern Rock are giving up their loan growth, so we would expect them to be scaling back loan growth expectations now."

James Cotton, mortgages specialist at London & Country, a broker, said Northern Rock, which is a relatively new entrant to the UK sub-prime market, said the move was a "blow to borrowers with credit problems."

Northern Rock's price rise will take effect from next Wednesday.

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