Alistair Darling tried to placate mounting concern yesterday that state ownership will allow Northern Rock to trump the loan and savings rates offered by banks and building societies.

His intervention came amid signs that investors were heeding the advice of analysts to take advantage of Northern Rock’s deposit accounts, some of which are among the best in the market.

Northern Rock is also about to become the only mortgage lender offering 125 per cent deals after four major lenders selling similar deals pledged to pull out of the market.

Mr Darling told MPs he would ensure that the nationalised bank would not “distort” the market and pledged to consult banks and building societies before approving its business plan.

The British Bankers’ Association said that a straw poll of its members showed concerns over competitition issues, with analysts saying the threat was greatest to smaller banks such as Bradford & Bingley and Alliance & Leicester.

But the Chancellor admitted that the Government faced a dilemma over the issue saying that, to carry on trading and so repay the £55 billion it owes to the Bank of England, Northern Rock must be able to compete.

His pledge came as MPs began the process of approving a Bill giving him temporary powers to nationalise Northern Rock, and any failing bank or building society.

He told MPs: “While we will not be involved in the day-to-day management of Northern Rock we do need to approve its business plan. We want to make sure that it is prudent, that it is sensible and it protects the interests of the taxpayer but also we want to make sure that it avoids distortions.

“The business plan, if it was built on taking advantage of the present temporary Government support, would not be consistent with our general aim of so running the bank to reduce and then remove that level of support.”

Mr Darling said that Northern Rock must be able to carry on conducting its business, as the alternative would be to wind it down, which ministers insist would mean a “fire sale” of assets and would generate lower returns for the taxpayer.

He said: “It would be far better to allow it to carry on trading. That means it has got to be able to compete. But obviously it would be wrong if it was doing so unfairly, taking advantage of the support it presently has.”

Abbey and Alliance & Leicester announced that they would stop selling loans of up to 125 per cent of the value of a property, as did Coventry Building Society and Godiva Mortgages. Birmingham Midshires, owned by Halifax, indicated that the future of its 125 per cent mortgage deal was not secure. It said the product was “under review in light of events”. This may well leave Northern Rock as the only place for borrowers who want to borrow more than 110 per cent of the value of their home. A Northern Rock spokeswoman said: “Our Together mortgage is still available and we are considering this position.”

The beleaguered lender is also attracting hordes of savers with some of the most competitive savings rates on the market. It is paying the top rate on its account for the over50s at 6.49 per cent. It is also offering a guaranteed rate of 6.45 per cent on its one-year savings bond, a rate only beaten by one other institution.

James Baig, 27, a City banker who deposited money at the Moorgate Branch of Northern Rock in London yesterday, said: “I ran straight to put my money in and a few of my colleagues have too because the rates are extremely competitive for what is essentially sovereign-backed wealth.”

Northern Rock’s rates are much more generous than National Savings & Investments (NS&I), the other state-backed savings institution. NS&I pays between 3.7 per cent and 4.05 per cent on its one-year bond.

Julia Bevan, 56, a City worker outside the Houndsditch branch, said: “The rate on the fixed rate bond is too good to miss. I’m attracted by nationalisation, it’s the safest place to put your money now.” But she added: “Alistair Darling has handled the whole situation badly. I’ve worked in the City for 30 years and never seen such a mess.”

Sue Hannums, of AWD Chase de Vere, an independent financial adviser, said: “When it comes to savings rates, it’s all about the best returns. It has some great deals and savers should take advantage of them unless they can get better deals elsewhere.”

Meera Patel, senior analyst at Hargreaves Lansdown, another independent financial adviser, said that savers should be ready to leave when the rates fell.

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