* "Challenger" bank blames sliding equity markets
* Some investors queried valuation - source
* Cancellation casts pall over upcoming Virgin Money IPO (Adds comment from Aldermore CEO and Virgin Money)
By Freya Berry
LONDON, Oct 15 (Reuters) - British bank Aldermore has cancelled plans to float its shares on theLondon Stock Exchange, blaming sliding equity markets as itbecame the latest European firm to drop listing plans in recentweeks.
The decision to scrap the offering, which could have valuedthe bank at about 800 million pounds ($1.3 billion), casts ashadow over the prospects of the bigger and better known VirginMoney, another lender seeking to list this month.
"Whilst we were out on the road, basically the bottom fellout of the market," said Aldermore Chief Executive PhillipMonks, adding that the lender still had ambitions to list.
"A number of investors turned round to us wistfully andsaid, 'you couldn't have picked a worse time to IPO'. But theyloved the story."
Aldermore and Virgin are among so-called challenger bankswhich the government hopes can break the dominance of Britain's"Big Five" of Lloyds, HSBC, Royal Bank ofScotland, Barclays and Santander UK,which together account for more than three-quarters of lending.
The bank, headed by former Barclays executive Monks andbacked by private equity firms AnaCap and Morgan StanleyAlternative Investment Partners, had planned to sell about 300million pounds of shares by Thursday and list the following day.
"The bank was being sold on growth at a time that we'reseeing a flight to safety. It was the wrong stock at the wrongtime," said a person close to the deal.
The source added that books "didn't get close" to beingcovered, and the valuation was regarded by some investors as toohigh. The bank set a price range of between 217 pence and 265pence per share, valuing the business at a maximum of 870million pounds.
The prospect of an interest rate rise in the United Statesand worsening economic outlook in Germany are among the reasonsfor an equities sell-off that has hit newly listed stocks inEurope, curbed investor demand for more offers, and pushedBritain's FTSE 100 down by over 8 percent since Sept. 4.
French energy services group Spie and Italian cosmetics firmIntercos both pulled their flotations last week.
VIRGIN MONEY
Virgin Money, backed by billionaires Richard Branson andWilbur Ross, plans to sell 150 million pounds of new shares andis expected to be valued at 1.5 billion to 2 billion pounds.
"We are still pursuing our IPO and are engaged withinvestors," a spokesman for Virgin Money said.
A source close to the deal said that the firm was watchingthe markets and other factors including the upcoming results ofthe European banking stress tests on Oct. 26 before openingbooks on the deal. Virgin Money had initially planned to openbooks this week, a second person close to the deal said.
"They'll be thinking, do they need to get it done in thefourth quarter?" the first source said.
Money raised in European IPOs has more than tripled so farthis year, with 188 deals raising $57.4 billion, up 263 percenton the same period in 2013.
However investors have become spooked by the poor marketperformance of many recent listings, with German firms RocketInternet and Zalando, and UKholidays-to-insurance company Saga trading well belowtheir issue prices.
"We have a big issue here. You already had rumblings frominvestors earlier this year. The problem is the hedge funds havebacked away from the market in quite a big way," a London-basedequity capital markets banker said.
"There's been all this pageantry from IPOs this year and yetthey haven't made money."
The Aldermore listing was led by Deutsche Bank and Credit Suisse, and advised by Lazard.Nomura and Numis Securities were co-leadmanagers.
($1 = 0.6283 British Pounds) (Additional reporting by Steve Slater; editing by Pravin Char)