Governor Mervyn King said he had not blocked a takeover of Northern Rock and would welcome one as a long-term solution.
Northern Rock has been seen as a likely takeover target since it was engulfed by a funding and customer confidence crisis on Friday. It prompted the worst run on a U.K. bank in living memory, and though withdrawals appear to have slowed, fears that other banks are facing problems continue to swirl.
HBOS shares fell over 7% amid speculation it faced funding problems or might ask the Bank of England for help, prompting a robust denial.
"It is complete and utter nonsense," a spokesman for HBOS said. "We have exceptionally strong capital resources and, in short, HBOS is one of the strongest financial institutions, and there is absolutely no foundation whatsoever in these rumors."
Shares in smaller lenders Alliance & Leicester and Bradford & Bingley were down over 7%, HBOS was down 4%, and Barclays and Royal Bank of Scotland had both dipped over 2%.
Northern Rock was down 20% at 205 pence, having slumped as low as 176p, valuing it at under 1 billion pounds ($2 billion), down more than 80% since the start of the year.
No Buyer to Come to its Rescue
Britain's fifth-largest mortgage lender was hit again by fears that no buyer would come to its rescue.
"The deafening silence is dispiriting for shareholders," David Buik at Cantor Index said. "It is believed that legal ramifications are preventing interested parties stepping up to the plate."
Analysts at bank ABN Amro, which had called Northern Rock a "trading buy" earlier this week as regulators encouraged buyers to come forward, abandoned its positive stance on Thursday.
"Recent commentary from the rest of the UK banks suggests they are reluctant to participate, which does not support near-term share price performance," the bank said in a note.
Late on Wednesday, Standard & Poor's downgraded the bank's rating to A- from A, with a negative outlook, saying it expected Northern Rock to begin to wind down if it was not acquired in the near future, an outcome it said was uncertain.
Not all investors headed for the exit, however, and RAB Special Situations said it had bought a stake of almost 5% in Northern Rock. The fund, part of $7 billion hedge fund RAB Capital, typically takes a long-term view on opportunistic investments.
Earlier on Thursday, the Treasury said in a statement that its proposed safety net for Northern Rock's customers would cover existing and reopened accounts but not new accounts.
It confirmed the guarantee would cover all Northern Rock accounts existing at midnight on Wednesday, Sept. 19, and reopened accounts, as well as existing and renewed wholesale deposits, and existing and renewed wholesale borrowing that is not collateralized.
The guarantee will not cover other debt instruments including covered bonds, securities issued under the "Granite" program, subordinated and other hybrid capital instruments.
Northern Rock has been struggling with rising borrowing costs since the credit crunch dried up its main source of funding -- the wholesale markets. It sparked a run on deposits last week, however, when the Bank of England was forced to step in with an emergency funding facility.