Hot on the heels of cash calls from Royal Bank of Scotland and Halifax Bank of Scotland, Bradford & Bingley announced plans for a £300m rights issue just weeks after it told the City it had no need to go to the stock market for a bail-out.

The move will have an impact on nearly a million small shareholders, many of whom are based in Yorkshire, who received 250 shares each when Bradford & Bingley demutualised in 2000.

Shareholders are being asked to take up the bank's offer of 16 new shares for every 25 currently held at a price of 82p, a 48 per cent discount to Tuesday's closing price. The figure was deliberately chosen to help small shareholders, who make up around 35 per cent of the group's investor base, as the 25 "currently held" figure is a tenth of what they received after the demutualisation.

A typical customer who received 250 shares will be able to buy 160 shares at a cost of £131.20. This would allow shareholders to maintain their stake in the company without it being diluted.

Investors can choose to take up the offer or let their rights lapse, in which case they would receive a cheque for their value although their stake will be diluted.

The dramatic u-turn, which came after Bradford & Bingley said in April it was monitoring its balance sheet but was "not intending to issue equity capital by way of a rights issue or otherwise", resulted in the shares falling over 9 per cent, down 14.75p, to 144p.

Bradford & Bingley claimed it had deliberately waited for markets to stabilise before going ahead with the deeply discounted share issue.

Chief executive Steven Crawshaw said: "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."

The move is the latest in a series of fundraisings by global and UK lenders as they seek to rebuild their capital reserves following drastic writedowns of risky assets. It will prompt fresh speculation that other banks, including rivals Alliance & Leicester and Barclays could follow suit.

Bradford & Bingley said it had been encouraged by rights issues from Royal Bank of Scotland and HBOS.

The mortgage bank, which did not announce any new writedowns alongside the share issue, dismissed speculation that the rights issue means it has seen a sharp deterioration in the UK mortgage market or capital markets.

Instead it claimed the cash will maintain its capital ratios at their historic position at the top end of the UK sector.

"Now is the moment to put the treasury asset issue behind us and move on," Mr Crawshaw said.

He said he remained confident that there is life in the mortgage market.

The fully underwritten issue is worth a third of the bank's market value and is due to be completed in mid-July.

Bradford & Bingley, which specialises in buy-to-let mortgages, said it would pay its interim dividend, due in October and expected to be around 4.2p per share, in shares instead of cash. Its 2008 final dividend will be paid in cash.

It added that demand for buy-to-let mortgages remained high, with continuing tenant demand and rising rents.

The bank has reduced its reliance on credit markets by selling £4bn in loans to boost cash reserves and has switched focus to lower-risk lending and increased savers' deposits, taking in £1.9bn during the first quarter.