Sir Richard Branson emerged as the likely winner of the takeover battle for Northern Rock last night after Olivant, a rival consortium, pulled out less than 15 minutes before the Treasury's deadline for bids for the troubled bank.

However, Northern Rock's largest shareholders continued to snub the Virgin consortium's offer, vowing last night to support a proposal by the bank's management to retain its independence. Shares in the Newcastle-based bank plunged 8 per cent to close at 88p on news of the Olivant consortium's withdrawal.

Treasury sources said that they were shocked by the dramatic withdrawal of the consortium led by Luqman Arnold, the former Abbey chief executive. The Treasury was last night talking to Olivant about its decision to drop out.

Sources with knowledge of the Olivant bid blamed conditions set by the Treasury for its withdrawal. The Treasury told bidders on Friday that they must repay £25 billion worth of government-guaranteed bonds within three years in order to satisfy European rules on state aid.

A condition of Olivant's bid was that the consortium would receive warrants of more than 7 per cent of Northern Rock's equity capital, which the consortium hoped to convert later. Sources said that the sums required to pay off the bonds, vital to the bank's rescue after interbank financing failed, would leave little to build the business over the next three years, slashing the value of Olivant's warrants.

Mr Arnold said: “We have been unable to formulate a value creation proposal which meets our investment criteria whilst also respecting the Government's proposed financing terms and the interests of other stakeholders in the company.”

JC Flowers, the US private equity firm, pulled out of the bid battle for Northern Rock last year, citing similar concerns.

George Osborne, the Shadow Chancellor, said that Olivant's withdrawal was “yet more bad news for taxpayers”. Mr Osbourne said: “The Chancellor's incompetent handling of the bid process has led to one of the long-standing serious bidders pulling out on the very day the bids were scheduled to be in.”

Treasury sources said that the Government had always privately favoured the Virgin bid because it was felt the least likely of the three options to lead to any further run on the bank.

Virgin yesterday confirmed that it would price at 25p per share its £500million rights issue to support Northern Rock. Existing shareholders will receive rights to subscribe for 4.7new shares for every share they already own, down from 6.1 shares under Virgin's original bid proposal.Virgin's bid will see it take control of more than 55 per cent of Northern Rock, which is unchanged from its previous proposal.

Meanwhile, the bank's management also revealed the terms of its solution. Sources said that management would cut Northern Rock's reliance on wholesale funding from 80percent, with just 30 per cent of lending supported by deposits, to a 50-50 split.

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