LONDON, Oct 2 Shares in battered UK mortgage bank Northern Rock suffered another day of v

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LONDON, Oct 2 (Reuters) Shares in battered UK mortgage bank Northern Rock suffered another day of volatile trade, recovering from a record low to climb 7 percent on talk of a 740 million pound ($1.51 billion) rescue package.

Engulfed in crisis since it was offered emergency funds by the Bank of England last month, Northern Rock's share price has fallen more than 80 percent since the start of September and some 90 percent from its year high of 1,258 pence in February.

But the shares were up 6 percent at 140 pence by midday on Tuesday, lifted by market talk of an unspecified rescue bid at 175 pence a share.

Traders also cited rumours that Northern Rock's buyout fund suitors -- which media reports named as JC Flowers and U.S. firm Cerberus -- were due to meet the bank later on Tuesday.

Northern Rock declined to comment.

''You have a lot of speculation, combined with a high degree of illiquidity in the shares at the moment -- that makes it very highly geared to every change in rumour,'' analyst Mike Trippitt at Oriel Securities said.

''I'm of a view that it is dramatically undervalued at 130p -- it's trading about a pound below the run-off value. Admittedly, short-term the cost of funding from the Bank of England is going to kill the earnings, but that is something that is going to be worked through.'' Earlier in the session the shares had fallen up to 15 percent on fresh concerns over its future and speculation of a deep-discount ''firesale''.

A Spanish newspaper also reported potential suitor Jose Maria Ruiz-Mateos had pulled out.

Newspaper ABC said Ruiz-Mateos, who emerged as a suitor last week, had written to Merrill Lynch complaining a meeting was set too late, 10 days after he first expressed an interest. He said the bank's situation had since ''considerably worsened''.

Speculation on the bank's future has been rife for two weeks as regulatory and political pressure increases on all parties to find a swift solution to the debacle, stem losses and curb the destabilising effect on the rest of the banking sector.

A trade sale of the bank in its current form is seen as increasingly unlikely, and analysts say they now expect Northern Rock to be wound down and parcelled off to more than one buyer.

Credit analysts at Royal Bank of Scotland said the size of Northern Rock's deposit book -- at over 24 billion pounds -- complicated its sale, but they said the sale of the branch network and deposit base could generate profit ''which would help to offset the discount required to shift the back book.'' ''For this to happen, Northern Rock must have given up hope of selling the business intact,'' the analysts said in a note.

Northern Rock's rise on Tuesday compares with a 2.8 percent jump in European banking stocks, boosted after profit warnings from UBS and Citigroup on Monday eased uncertainty over losses linked to the credit crunch.

Speculation of talks between Northern Rock and a buyout fund also lifted the cost of insuring Northern Rock's debt against default.

Traders said five-year senior credit default swaps widened 40 basis points to 185 basis points -- meaning it costs 185,000 euros a year to insure 10 million of debt against default.

REUTERS PBB PM1822

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