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 full-scale nationalisation for Prime Minister Gordon Brown, who has seen his popularity slump in opinion polls in recent weeks.
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 - and any other potential suitors.
The finance ministry said in a statement it wants suitors to submit detailed proposals by February 4.
The bank will be temporarily nationalised if none of the offers is acceptable, it said.
The government said it would require "an appropriate share in potential upside equity returns" after criticism that taxpayers would be guaranteeing billions of pounds while a successful bidder reaps most of the reward.
Under the proposed structure, Northern Rock would sell a pool of its assets to a financing vehicle, which would fund the purchase through bonds sold on to private investors and backed by government guarantees. The deal will need to comply with European Union rules on state aid for private companies.
Northern Rock is estimated to owe the Bank of England 24 billion pounds since seeking emergency funds in mid-September after being unable to raise cash in financial markets. News of the emergency loans prompted the first run on the deposits of a major British bank for over 140 years and kick-started the auction for the lender.
