Alliance & Leicester (A&L) saw £1.2 billion cut from its market value yesterday as investors abandoned the mortgage sector amid fears of contagion from Northern Rock.

Shares in A&L, Britain’s fifth-largest mortgage lender, plunged 31 per cent to 600p yesterday. The bank’s shares have lost 36 per cent since last Thursday, when the market panic over Northern Rock’s emergency loan from the Bank of England began. The Leicester-based bank’s stock plummeted by 15 per cent in the last half-hour of trading on the London Stock Exchange, sparking speculation that A&L was preparing to tell the market that, like Northern Rock, it had tapped the Bank for credit.

David Buik, a spread-betting pundit at Cantor Index, said: “It has felt as if someone has got the early wire on them, like they did in Northern Rock the other day. Have the A&L had to borrow from the Old Lady of Threadneedle Street?” A spokeswoman for A&L was adamant that the bank had not borrowed from the Bank of England. She said that the bank’s situation had not changed since its upbeat interim results last month, when it said that it did not expect its business to be affected by the global credit crunch.

Meanwhile, shares in Bradford & Bingley (B&B), another prominent mortgage lender, dropped yesterday by more than 15 per cent to 279p, taking its losses since Thursday to 21.9 per cent. Both banks were dragged down when analysts at Citigroup downgraded their earnings forecasts for 2008 and 2009 and advised investors to sell the stock. B&B reiterated yesterday that the funding for its business was secure.

Shares in Northern Rock fell more than 35 per cent to 282¾p each yesterday, as customers continued to flock to branches across the country to withdraw their savings and transfer their mortgages. More than £2 billion is estimated to have been taken out of Northern Rock since news of its Bank loan emerged.

The bank will run an advertisment in national newspapers today in which Adam Applegarth, the chief executive, apologises to customers for their “anxiety and inconvenience”. He says: “I know how worried many of you must have been. These have been troubled times, but Northern Rock will prevail.”

Yesterday the Government said that it would guarantee the safety of Northern Rock’s retail and wholesale deposits, worth about £28 billion, while the bank frantically seeks an acquirer.

A statement by Northern Rock said last night that the bank was not in talks with a bidder but that its board was “aware of its fiduciary duty and is actively considering all strategic options in the interests of shareholders, customers and other stakeholders”. As late as Friday Northern Rock executives were believed to be confident that a white knight could be found, despite a potential deal with Lloyds TSB falling apart. Lloyds TSB is thought to have been in talks with Northern Rock until as late as last Tuesday but withdrew, in part, because of continuing uncertainty in the credit market, but also because it could not agree terms with the rival bank, City regulators or the Bank of England. By then both the Financial Services Authority and the Bank were in close contact with Northern Rock as they waited to see whether a market resolution to the bank’s shaky future could be found.

It is thought that Lloyds TSB would have retained the Northern Rock name, which, before the announcement last Friday, still had some cachet. The bank is believed to have been attracted by Northern Rock’s strong customer satisfaction levels and efficiency. However, it is not thought that the talks progressed as far as opening the bank’s books, which, effectively, would have put Northern Rock up for auction.

At the time Northern Rock was attempting to sell itself without fanfare, for fear that rumours of a forced sale would hit its share price. Yesterday a leading shareholder criticised the bank’s decision to play hard-to-get with buyers, saying that the board should not have held out for the Bank of England loan but foreseen the panic the borrowing would cause and gone for a quick sale instead.

“The credit line meant that they had an alternative, the idea being that it wouldn’t then look like a distressed asset,” he said. “But look what’s happened as a result.”

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