Britain nationalizes ailing Northern Rock

By Sumeet Desai and Marc Jones

LONDON (Reuters) - Britain decided to nationalize Northern Rock NRK.L on Sunday, abandoning a five-month attempt to snare a private sector buyer for the ailing bank and piling more pressure on Prime Minister Gordon Brown.

Britain's fifth-largest mortgage lender has borrowed 25 billion pounds ($49 billion) from the Bank of England since its funding model collapsed in the credit crisis last year, sparking the first run on deposits at a British bank for some 140 years.

The Northern Rock debacle has become a major headache for Brown and his finance minister Alistair Darling, tarnishing the Labour government's popularity and denting the prime minister's reputation for being a guardian of financial stability.

Darling told a hastily arranged news conference that nationalization would be temporary and the bank would be returned to the private sector when markets stabilized. But it was the best option for protecting taxpayers.

"Market conditions will improve. Northern Rock's mortgage book is good but I think it would be a mistake for us to abandon this asset and take a loss now," he said.

"We had to intervene here, because if we let this bank fail there was every chance ... the problems would have spread into the wider British banking system," he said.

The mortgage lender already owes taxpayers 25 billion pounds ($49 billion) and has been put on the government's books, classified as around 90 billion pounds of public debt.

The government will put forward legislation on Monday to take the bank into public hands -- the first major nationalization in Britain since the 1970s -- and trading in Northern Rock shares was suspended.

The opposition Conservatives said they opposed the move.

"This is a day when Labour's reputation for economic competence died," Conservative spokesman for economic affairs George Osborne said. "We will not back nationalization. We will not let Gordon Brown take this country back to the 1970s."

Brown will hold a news conference at 1100 GMT on Monday.

RESPECTED TROUBLESHOOTER HIRED

Brown, who helped transform the Labour Party in the 1990s by ditching its previous attachment to state-ownership, has seen his popularity slump in opinion polls since the Northern Rock run and has been accused of dithering over key decisions.

He is now staking his reputation on markets returning to normal. The risk is that with the economy slowing, the housing market turning down and some banks still to reveal the full impact of the credit crunch on their balance sheets, Northern Rock's huge mortgage portfolio may struggle to find a buyer.

While the government has criticized the bank's business model, it has blamed a credit crisis that started with risky mortgage lending in the United States and has spread throughout the world for sparking Northern Rock's woes.