Bradford & Bingley announced plans to tap shareholders for £300m through a rights issue in an apparent u-turn which raised questions about the credibility of management and sent shares in the firm plunging.

The UK's eighth-largest bank said it planned to use a deeply-discounted share issue to repair the damage to its balance sheet resulting from the global credit crunch.

The decision, which comes soon after Royal Bank of Scotland and HBOS set out to raise £12bn and £4bn to help cope with more difficult conditions in banking markets, prompted renewed speculation that others would follow suit.

Following pointed denials last month by Bradford & Bingley directors of any intention "to issue equity capital by way of a rights issue or otherwise", news of the rights issue provoked a furore in the City. Shares in the firm fell 9% to a record low.

"This seems a complete u-turn from a month ago, when B&B played down press speculation that they would do a rights issue," analyst Bruce Packard at Pali International said.

"It has been suggested to us that the B&B CEO is out of his depth', and we wouldn't disagree."

In a conference call with investors and analysts, directors were pressed repeatedly to explain the rationale for the apparent volte face and to say whether there had been a deterioration in the mortgage book since the last update in April.

However, directors insisted the rights issue was a considered response to developments in the last month.

Stressing that directors had said they intended to monitor the balance sheet, chief executive Steve Crawshaw said the issue was designed to compensate for the damage to Bradford & Bingley's equity base resulting from the write down of treasury assets. This followed a foray into complex structured financial products by the mortgage specialist in recent years.

Crawshaw said Bradford & Bingley had decided to do the fund-raising after the market for such assets stabilised, allowing the bank to get a better handle on its possible exposure.

"(The) stability of the markets is the moment we feel is the right moment to launch a rights issue, not in the middle of a maelstrom," he told reporters.

"That's the difference that a month makes - it's the fact we have been able to see a much more stable period across the globe, and it's into those stable periods that a rights issue should be launched."

Crawshaw said the issue would enhance Bradford & Bingley's position as one of the "better-capitalised banking groups in the UK". This could help it cherry pick business in the core markets for UK home loans and buy-to-let mortgages, in which demand remains strong.

Following the issue Bradford & Bingley should have a proforma, end-2007 core Tier 1 capital ratio of 9.2%, up from 7.7%. This compares with Royal Bank's post-rights issue level of "in excess of 6%" and HBOS's targeted 6-7%.

Directors appear to believe that Bradford & Bingley is justified in paying what appears to be a high price to complete the issue, underwitten by Citigroup and UBS investment banks.

Bradford & Bingley expects to raise around £300m by issuing 16 new shares for every 25 in existence, at 82p per share, representing a 48% discount to Tuesday's 158.75p closing price and a 36% discount to the theoretical ex-rights price.

The bank also said it would pay its interim dividend, expected to be around 4.2p per share, in shares instead of cash. The final dividend will be paid in cash, though a lower payout is expected.

Paul Mumford, fund manager at Cavendish Asset Management, said the news seemed to confirm a worrying trend of UK banks making heavily discounted bids for cash.

"The market is a-buzzing with who next?', and Alliance & Leicester and Barclays can expect to be watched like hawks in the coming days," he said.

On Tuesday, Alliance & Leicester announced £192m further write-downs and refused to rule out a possible dividend cut.

Shares in Bradford & Bingley closed down 14.75p at 144p.