The battle for Northern Rock intensified yesterday when the largest shareholder substantially raised its stake in a sign of its determination to block Sir Richard Branson’s takeover of the stricken lender. Financial Times, Daily Telegraph

Jon Wood’s SRM hedge fund increased its stake to 8.5% in a clear power play intended to cajole the bank’s board into looking at other suitors in addition to Sir Richard’s Virgin consortium, which was chosen by Northern Rock’s board this week as preferred bidder.

Wood and RAB Capital, whose combined holding in Northern Rock is more than 15%, and other shareholders are separately backing a rival plan led by Olivant, the private equity group headed by Luqman Arnold, the former Abbey boss.

Shareholders fear that the Virgin deal would leave them with a massively diluted stake in the new business.

A united front by shareholders could block the bid and the hedge funds hope a solid show of opposition will compel Northern Rock and the government to come back with a better deal.

Alistair Darling has made a strong defence of his handling of the Northern Rock crisis, arguing that if he had let the bank go bust it would have sent shock waves through the economy.

Propping up the bank until a buyer was found was never going to be easy, but letting it 'go down' would have been extremely damaging, the Chancellor told the CBI’s annual conference yesterday.