One of Northern Rock's largest shareholders last night threw its support behind management proposals to prevent a takeover of the Newcastle-based bank.

Olivant, the consortium led by Luqman Arnold, the former Abbey chief executive, pulled out of the bidding war for the Rock yesterday, leaving the management team to fight it out with Sir Richard Branson's Virgin Group for control of the bank.

RAB Capital, the hedge fund manager, said that it would move its support from Olivant to the management team. A spokesman said: “We have always said that we wanted to see a strong and independent solution for Northern Rock. There is only one strong and independent solution available, in the shape of the proposal from the Northern Rock management team, led by Paul Thompson. They should assume that they have our support.”

The Treasury has the final say on the Rock's future, but it is likely to take shareholders' views into account, to help to ensure that investors will pay for the rights issues, or discounted stock offerings to existing shareholders, that form part of each bid.

David Pitt-Watson, a spokesman for Hermes, the fund manager, which has a substantial stake in the bank, said: “We need a continued private sector solution. The Government, shareholders and the board need to work together to get the best possible asset out of this. But whatever's done needs to be agreed by the shareholders.”

SRM Global, the hedge fund manager that is Northern Rock's largest shareholder, was unavailable for comment last night.

Olivant had planned to maintain and increase the size of the bank, but yesterday the standalone proposal put forward by Northern Rock's board said that it would involve “business stabilisation [and] controlled reduction of [the] current loan book”, raising fears among staff of job cuts. This downsizing is expected to take three years. Virgin's new proposal did not give details of its plans for staff numbers.

The Treasury is keen to find a private buyer for Northern Rock and is expected to make a decision on the winning bidder by the end of this month, to give lawyers time to finalise the deal before it goes to the European Commission for approval on March 17.

The Chancellor told a dinner of the Worshipful Society of International Bankers last night that he did not intend to impose extra constraints on the banks, despite the near-collapse of Northern Rock. Alistair Darling said that additional constraints could endanger London's position as the world's financial capital.

Rescue options

Standalone proposal

— Paul Thompson, former chief executive of Britannic, to take over as chief executive, with Northern Rock chief executive Andy Kuipers becoming deputy CEO

— Raise at least £500 million from institutional investors

— Downsize the bank over three years, paying off the £25 billion government-gauranteed bonds

— After three years, begin “modest growth” in prime lending, pay dividends and return capital to investors

Virgin solution

— Jayne-Anne Gadhia, chief executive of Virgin Money, to become chief executive. Sir Brian Pitman, a senior adviser to Morgan Stanley, to be executive chairman

— Inject £500 million from bid consortium members, plus a capital raising of £500 million

— Merge Virgin Money with Northern Rock. Rebrand Northern Rock as Virgin Money

— Pay off £25 billion government-guaranteed bond issue over three years

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