The British government has published plans to keep Northern Rock, the bank almost sunk by the global credit squeeze, in the private sector - but has admitted it could still be nationalised.
The Treasury said it preferred a private sector buy-out of the mortgage lender, although it would bring forward legislation to take Northern Rock into short-term public ownership should there be no sale.
Investors cheered the news, sending Northern Rock's share price surging 46% to 94.25p at the close - in stark contrast to a slump across the London and European stock markets.
British Chancellor Alistair Darling, outlining the plans before parliament, said Northern Rock bidders had struggled to raise funds due to the ongoing credit crunch that had sparked the crisis back in September.
'Ideally, the best solution would have been a private sector solution without any government support but in current uncertain market conditions that is not possible,' Darling told MPs.
Northern Rock, which has already been bailed out by the Bank of England to the tune of £26 billion, said it welcomed the Treasury's preference for a private sector solution.
Under a fresh rescue plan, the public money lent to Northern Rock would be converted into government bonds, a move that would allow a private buyer to escape a heavy loan repayment, the Treasury said in a statement.
Northern Rock is in talks with two potential private sector buyers - a consortium fronted by Richard Branson's Virgin Group, and Olivant Advisers, a buyout firm led by Luqman Arnold, former chief executive of retail bank Abbey.
The Treasury's rescue package would see Northern Rock selling a pool of its assets to a financing vehicle, which would be used to pay off the Bank of England loans.
The financing vehicle would pay for the deal in bonds, with the British government guaranteeing any payment of interest on the issued notes. Any losses in the asset pool would first be borne by Northern Rock.
