The Bank of England will on Friday provide emergency funding to rescue Northern Rock, a leading UK mortgage lender that has fallen victim to the credit squeeze triggered by the US subprime meltdown.

Northern Rock, which had more than $200bn in assets at the end of June, is the first UK financial institution to be propped up since the Bank of England in 1998 revised the rules under which it would act as a lender of last resort to banks. The BoE is on Friday expected to say that a similar facility is available to any other institution facing short-term difficulties.

Details of the rescue emerged late on Thursday after a relatively calm day on global markets. US stocks closed higher after Countrywide, the US mortgage giant that has had trouble borrowing in the money markets, secured $12bn additional funding from its banks. The cost of three-month borrowings in the interbank market fell slightly for dollar, euro and sterling instruments after soaring recently.

Northern Rock’s shares had lost half their value since February because of concerns that the rising cost of raising funds in the money market would squeeze profit margins and limit growth. It was understood that UK regulators were not concerned about the quality of Northern Rock’s mortgage book, which has no exposure to subprime borrowers, or its capital levels. Rather, the bank proved vulnerable to the turmoil in the money markets because it has a smaller deposit base than other UK banks. The Bank of England was expected to reassure thousands of Northern Rock customers that their deposits were secure.

Northern Rock approached the Bank of England at the end of last week to discuss using the facility, people familiar with the situation said. The lender made its decision because it faced pressure to refinance obligations that are due to mature in the next couple of weeks.

Northern Rock executives were expected to say on Friday that the bank would try to work through its difficulties with the help of the Bank of England facility. However, the move is likely to make it hard for Northern Rock to remain independent in the long term. The bail-out is a devastating blow for the bank, which grew from its roots as a building society in the north-east of England to become the most efficient mortgage lender in the United Kingdom. Northern Rock declined to comment.

The rescue came as the Federal Reserve released data showing that direct loans to banks, through its discount window, had reached their highest level since the September 11 attacks.

The Fed cut its discount rate to 5.75 per cent last month to combat the credit squeeze.

It also took steps to increase liquidity by extending the life of its loans and agreeing to accept mortgage-backed securities as collateral.

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