LONDON (Reuters) - U.S. buyout firm JC Flowers submitted an offer for Northern Rock, according to a person familiar with the situation, as shares in the stricken British bank tumbled on fears that any offers will be low.

JC Flowers' proposal includes an offer to Northern Rock shareholders at a "nominal value", the person told Reuters.

Northern Rock shares fell over 40 percent in early trading due to mounting concern that shareholders will not get much value from their holdings, but by 11:40 a.m. the shares had pared some of their losses and were down 10.8 percent at 93 pence, valuing the bank at 390 million pounds.

JC Flowers' proposal includes the repayment of 15 billion pounds in emergency loans to the Bank of England, and the repayment of further borrowing estimated at 10 billion pounds over time, probably by the end of 2010, the person said.

JC Flowers would take the business private and inject at least 1 billion pounds in new investment to support the bank's balance sheet and underwrite a new business plan. It would keep the Northern Rock name and presence in the northeast of England, he said.

Advisers to Northern Rock are auctioning the bank and said on Monday they had received some interest, but none of the offers were for all the bank and all valued the equity at "materially below" its value at the end of last week.

Northern Rock shares plunged as much as 42 percent early on Tuesday, triggering eight brief suspensions, as investors continued to head for the exit. The 42 percent drop was its biggest intraday fall since it entered the FTSE 100 in October 1997, according to Reuters data.

LOW OFFERS

The Newcastle-based bank is Britain's most prominent casualty of the global credit market turmoil, which has also weighed on other mortgage lenders, such as Alliance & Leicester and Bradford & Bingley.

Northern Rock's advisers expect to attract interest from eight to 10 parties, banking sources say.

The Times said U.S. private equity firm Cerberus had dropped plans to table a bid for Northern Rock, dealing another blow to the embattled bank.

"I firmly agree that a sale is the wrong thing. The situation is a shambles and probably managing the business for a turnaround rather than a sale right now is the right way forward, given the bids on the table are probably below 1 pound (per share)," said Mike Trippitt, analyst at Oriel Securities.

"The problem right now is with the level of retail deposits that have walked out the door and the emergency funding, it becomes less and less attractive," he added.

Northern Rock is estimated to have borrowed about 25 billion pounds from the Bank of England since it was forced to turn to it for funds in mid-September after being unable to raise finances in wholesale markets.

Britain's Treasury said on Monday it would be partial to bids that minimised government involvement, and any buyers should not just assume that a loan agreement with the Bank of England would be available beyond a sale or when the credit line expired.

"No one knows which way it is going to go. No one knows whether it is going to be broken up, whether it is going to be privatised, whether it is going to be taken over," said Mark Priest, a trader at TradIndex.

"Uncertainties in these conditions are just going to make this stock worse and worse and worse. We also have UBS and Swiss Re in Switzerland going limit down today. This banking sector is walking on a knife edge."

Shares in midcap British buy-to-let lender Paragon tumbled 40 percent after it said it may need to raise 280 million pounds from shareholders due to problems raising finances.