Parliament passed legislation on Thursday allowing the government to nationalise Northern Rock, five months after the bank became a high-profile casualty of the global credit crunch.
The Banking (Special Provisions) Act allows orders to be issued for the transfer of all shares in Northern Rock to the government and for an independent auditor to calculate how much money shareholders should receive.
The country's fifth-largest mortgage lender was rescued by loans of about 25 billion pounds from the Bank of England in September and the government also stepped in to guarantee deposits.
Prime Minister Gordon Brown's government said the collapse of Northern Rock would have posed risks to the wider financial system and that saving the bank was therefore essential.
The government initially sought a private buyer but rejected two offers last weekend and decided to nationalise the bank instead. The legislation was then pushed through parliament.
Brown has been criticised by the opposition for the way the government has handled the Northern Rock issue.
He trails Conservative Party leader David Cameron in opinion polls and surveys show the public now has more faith in the main opposition party's ability to handle financial affairs than the ruling Labour Party.
Northern Rock's new management team, headed by financial troubleshooter Ron Sandler, will draw up a business plan for the bank with a view to selling it to a private sector bidder in due course.
Those plans will be influenced by European Union state aid rules. The European Commission is likely to force Northern Rock to shrink to compensate for the state aid it has received.
Such downsizing is standard for companies, publicly or privately owned, that obtain significant government aid for restructuring. The rules are designed to deal with the concerns of competitors who see government aid going to a rival.
