The government set a two-week deadline for a private-sector rescue of Northern Rock that would allow the stricken bank's 25 billion pound emergency funding to be converted to government-guaranteed bonds to help smooth a deal.
The financing package will tie the government to Northern Rock, Britain's biggest casualty of the global credit crunch, for years to come.
But it also increases the prospect of a private-sector takeover, which would avoid a politically damaging nationalisation for Prime Minister Gordon Brown, who has seen his popularity slump in opinion polls in recent weeks.
"My proposal today is one in which Northern Rock is owned and run in the private sector as a commercial bank - and where the government provides a backstop guarantee to make private financing possible in the current market conditions," Chancellor Alistair Darling told parliament.
Details of the plan sent Northern Rock's battered shares soaring on Monday. They closed up 46 percent at 94.25 pence, still down around 90 percent since the end of May.
The financing package will be available to the three front-runners for a private-sector deal -- Richard Branson's Virgin Group, a rival consortium led by investment firm Olivant, and an in-house solution under new Northern Rock management.
It could also tempt other potential suitors such as private equity firms J.C. Flowers or Cerberus, though the tight deadline means they need to make a quick decision.
The finance ministry said in a statement it wants suitors to submit detailed proposals by February 4. The bonds were expected to have maturities of up to about five years.
The bank will be temporarily nationalised if none of the offers is acceptable, it said, but it warned shareholders they would be likely to get little or nothing under such a move.
"We're delighted that a private sector solution looks to be the most likely outcome," said a spokesman for RAB Capital, the bank's second biggest shareholder, with an 8 percent stake.
SHARE OF PROFITS
The government said it would require "an appropriate share in potential upside equity returns" under a takeover after criticism that taxpayers would be guaranteeing billions of pounds while a successful bidder reaps most of the reward.
