LONDON (Reuters) - A consortium led by Richard Branson's Virgin Group expects to repay Northern Rock's emergency loans from the Bank of England within three years, it said after being picked as the bank's preferred rescuer.

Virgin's proposal may calm a mounting political dispute about the use of taxpayer funds to help Northern Rock and also offers some potential upside to shareholders. Analysts said both factors probably helped it win support for its deal.

Northern Rock said the consortium would repay £11 billion ($22.6 billion) immediately to the Bank of England if its bid was successful.

The full loan — estimated at up to £25 billion — should be paid off in full in two or three years, according to the proposed head of the bank under Virgin's offer.

Jayne-Anne Gadhia, the chief executive of Virgin Money, said she is confident that Northern Rock's shareholders will support the Virgin consortium's offer, despite some investors calling for the auction to be scrapped.

"This is the best deal on the table as far as I can see, for shareholders and for the survival of Northern Rock going forwards as a business. I think shareholders will want to support it," Gadhia told Reuters in an interview.

Virgin's consortium, which includes buyout firm WL Ross, investment group Toscafund and Hong Kong-based investment group First Eastern, said under its plan £1.3 billion of new cash will be injected into Northern Rock.

Half the cash will come from the consortium and half will be raised through a rights issue at 25 pence per share. The consortium will also inject Virgin Money, the Virgin financial services company, into the bank, with an implied valuation for Virgin Money of £250 million.

Other potential bidders such as US buyout firm J.C. Flowers are likely to remain interested, however.

Olivant, an investment group led by Luqman Arnold, former head of Abbey National, was due to discuss its proposal with government officials and regulators late yesterday, a person familiar with the situation said. Olivant wants to take a minority stake in Northern Rock and parachute in new executives.

Northern Rock shares jumped 28 percent to close at £1.10, recovering from an early 18 percent tumble, due to the possibility of a counter-bid and technical considerations, with short position holders forced to pay up to cover their holding.

The rise lifted the bank's value to £460 million.

Northern Rock said returns on Virgin's investment would be restricted until the public sector loans had been paid back.

The loan from the Bank of England will be paid back at a commercial rate, and interest will be paid in cash.

The Virgin consortium has arranged a liquidity facility of up to 15 billion pounds from Citigroup, Royal Bank of Scotland and another major European bank, Gadhia said.

"Undoubtedly the fact they are offering to pay back £11 billion on day one and then to rank the government pari passu with the other creditors is absolutely critical in winning the political approval for the deal," said Simon Maughan, bank analyst at MF Global.

Britain's finance minister Alistair Darling said the terms of Virgin's proposal met its three aims of protecting taxpayers and depositors and ensuring wider financial stability, and also met rules on European state aid.

A deal could yet face problems from shareholders.

Northern Rock's top two investors — hedge funds RAB Capital and SRM Global — have urged advisers to scrap the auction to prevent any firesale and allow a vote on the sale of all or part of the bank.

Northern Rock said such action was not "warranted or appropriate" but if necessary it would convene a meeting.

Branson, one of the world's highest-profile businessmen and estimated to be Britain's 11th richest person with a £3.1 billion fortune, said he is not planning any material cuts to Northern Rock's 6,000 staff and will keep its Newcastle base.

The bank will be renamed Virgin Money, keep a stock market listing, rebuild a deposit base and have financial flexibility.

"Not only are we certain that we've got the banking and the stability side of things right, but we've got a brand that nobody else has got," Gadhia said.

The Virgin consortium will hold no more than 55 percent of the enlarged group if the underwritten rights issue of shares is fully taken up.

Brian Pitman, who as chairman and CEO of Lloyds TSB was regarded as the most influential British banker of the 1990s, would be chairman of the enlarged Virgin Money. George Mathewson, former head of RBS and architect of major deals including the NatWest takeover, is an adviser.

US insurance giant AIG, which had been named as part of Virgin's initial consortium, will offer credit insurance to help raise debt, but it is not putting in equity.

Northern Rock said its board will continue to explore other options as part of its strategic review.

Northern Rock is being advised by Merrill Lynch, Citigroup and Blackstone. Virgin's advisers are Greenhill and New Boathouse Capital, part of Quayle Munro.