Olivant, the private equity group, last night dramatically pulled out of plans to rescue Northern Rock in a move that confounded the UK government and left just two proposals to take control of the stricken bank.

Olivant, led by Luqman Ar-nold, former chief executive of Abbey National, was due to submit its proposal for the bank to the government yesterday. However, the private equity group pulled out an hour before the afternoon deadline, blaming in-flex-ible terms laid down by the government in its financing package.