Northern Rock's shareholders were furious last night over the Chancellor's decision to nationalise the troubled bank, effectively rendering their shares worthless.

The Treasury now faces expensive and lengthy legal action from enraged institutional and retail investors.

Meanwhile, Sir Richard Branson said that his Virgin group would make no further attempt to rescue the bank after his £1.25 billion offer was rejected by the Government. Members of the management team that had also submitted an offer were waiting to learn last night how long they would keep their jobs in the nationalised bank.

Trading in Northern Rock shares will be suspended. At about 3.30pm today the Chancellor will give details to the Commons on the nationalisation, which is expected to take place within days. So far, the Treasury has refused to say how many jobs will be lost from the bank or how long it will be in public ownership. Bankers involved in the deal described Alistair Darling’s decision to abandon the auction of the bank as an “astonishing failure”. One said: “Darling has to go.”

The UK Shareholders’ Association, which represents 100,000 small shareholders in Northern Rock, said that Mr Darling’s decision to abandon negotiations with the two commercial bidders was akin to theft. Roger Lawson, director of the association, said: “It seems the only reason that the Government has chosen nationalisation is because ‘it offers better value to the taxpayers’. This is equivalent to a thief telling you it offers better value to him to steal from you than to enter into a commercial transaction with you.”

The association vowed to use any legal option to block nationalisation. SRM Global, the hedge fund that is Rock’s largest shareholder, has already threatened to sue the Government if it does not offer investors compensation of 400p a share. SRM and the RAB hedge fund have invested £150 million in Rock for a stake of nearly 20 per cent. One institutional investor said: “This is clearly disappointing and shouldn’t have been necessary.”

The Chancellor said that he would appoint an independent arbitration panel to value the bank and calculate any compensation due. This process could take months and Mr Darling has already told investors that the valuation would be conducted as if Rock had never received government assistance. Shareholders said that without the government guarantee on accounts or the estimated £25 billion emergency loan from the Bank of England, Rock is effectively bust, rendering their investments valueless. Robin Ashby, of the Northern Rock Small Shareholders’ Association, described Mr Darling’s decision as “appalling”.

Peter Montagnon, of the Association of British Insurers, which represents Britain’s largest shareholders, said that nationalising Rock could make it harder for UK banks to raise money by issuing corporate bonds. He said: “We will have to look for any arrangements for compensating shareholders and it is also important that the rights of bondholders are respected. If not, we could see a reduced willingness in the bond market to fund banks. We will be watching very closely what happens to bondholder rights.”

Angela Knight, chief executive of the British Bankers’ Association, said that Mr Darling’s dithering over Rock had harmed the reputation of the UK’s financial services sector. “A decision should have been reached much earlier, as this has not helped the perception of the industry,” she said.

The Chancellor rejected rival offers by the Branson consortium and the Rock management because he believed that they posed too high a risk to taxpayers and involved too much public subsidy for funding the bank in the next three years. Virgin’s offer, he complained, would offer a return for the Government only after the bank was worth £2.7 billion, while the management team’s proposal required the Government to maintain its guarantee of Northern Rock’s deposits for too long.

Last night Sir Richard said: “We put all the resources of Virgin’s senior management team on this for five months and, we believe, had a very strong proposal.”

A source with knowledge of the consortium’s bid said that the £2.7 billion target was not over-optimistic, given that the Virgin consortium planned to inject £1.25 billion into Rock and that Rock has a present market capitalisation of almost £400 million.

Sources close to the management said it is to stay on for a handover to Ron Sandler, the former Lloyd’s of London chief executive chosen by the Treasury to lead a nationalised Rock.

Virgin and the management will have their bid costs met by the Government up to £5 million, but both are thought to have run up higher bills.

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