LONDON - A consortium led by Richard Branson's Virgin Group has been picked as the preferred bidder to rescue Northern Rock and plans to repay 11 billion pounds quickly to the Bank of England.

Virgin's proposal may calm a mounting political dispute about the use of taxpayer funds to help Northern Rock and also offers some potential upside to shareholders, and analysts said both factors are likely to have sealed its success.

Northern Rock said the Virgin consortium had set out a clear path to repay fully loans to it from the Bank of England that are estimated to have reached 25 billion pounds since a crisis around the bank erupted in mid-September.

"Undoubtedly the fact they are offering to pay back 11 billion (pounds) on day one and then to rank the government pari passu with the other creditors is absolutely critical in winning the political approval for the deal," said Simon Maughan, bank analyst at MF Global.

Against political concerns a buyer could reap a quick profit, Northern Rock also said returns on Virgin's investment would be restricted until the public sector loans had been paid back with interest.

Virgin's consortium, which includes buyout firm WL Ross, investment group Toscafund and Hong Kong-based investment group First Eastern, said under its plan 1.3 billion pounds of new cash will be injected into Northern Rock.

Half the cash will come from the consortium and half will be raised through a rights issue at 25 pence per share. The consortium will also inject Virgin Money, the Virgin financial services company, into the bank, with an implied valuation for Virgin Money of 250 million pounds.

Northern Rock shares tumbled 18 percent in early trading on the prospect the battered shares will be further diluted, but by 10:45 a.m. the stock had rebounded sharply and was up 29 percent at 111p, valuing the company at 460 million pounds.

Analysts attributed the rally to the possibility of a counter-bid and technical considerations, with short position holders forced to pay up to cover their holding.

A deal could yet face problems from shareholders.

Northern Rock's top two investors -- hedge funds RAB Capital and SRM Global -- have urged advisers to scrap the auction to prevent any firesale. SRM Global said an extraordinary shareholder meeting should be held to allow a vote on the sale of all or part of the bank.

Northern Rock said it did not consider such action "to be warranted or appropriate" but if necessary it would convene a meeting.

Shareholders were told they need to accept a deal or risk the bank going into administration, people familiar with the situation have said. Virgin is also not proposing a break-up.

VIRGIN PLAN

Branson, one of the world's highest-profile businessmen and estimated to be Britain's 11th richest person with a 3.1 billion pound fortune, said he is not planning any material cuts to Northern Rock's 6,000 staff and will keep its Newcastle base.

The bank will be renamed Virgin Money, keep a stock market listing, rebuild a deposit base and have financial flexibility.

"We will achieve all this without additional burden on the taxpayer and we will offer shareholders the opportunity to participate in the future growth of the business," Branson said in a letter to Northern Rock's customers.

The Virgin consortium will hold no more than 55 percent of the enlarged group if the underwritten rights issue of shares is fully taken up.

Brian Pitman, who was chairman and chief executive of Lloyds TSB and regarded as the most influential British banker of the 1990s, would be chairman of the enlarged Virgin Money.

Jayne-Anne Gadhia, Virgin Money's chief executive, would have the same position at the enlarged group, advised by George Mathewson, former chairman and CEO of Royal Bank of Scotland and architect of deals including the NatWest takeover.

U.S. insurance giant AIG, which had been named as part of Virgin's initial consortium, will offer credit insurance to help raise debt, but it is not putting in equity.

Northern Rock said its board will continue to explore other options as part of its strategic review.

U.S. buyout firm J.C. Flowers was regarded as the nearest rival to Virgin in getting backing. Other potential suitors include investment firm Olivant, backed by former Abbey National chief executive Luqman Arnold, and Cerberus, another U.S. buyout firm, in tandem with U.S. finance firm GMAC.

Northern Rock is being advised by Merrill Lynch, Citigroup and Blackstone. Virgin's advisers are Greenhill and New Boathouse Capital, part of Quayle Munro.