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.

As a result it is likely to be offered an equity stake, possibly by the bidder offering it warrants.

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 and the government has until March 17 to come up with a full solution to go before the European Commission.

Treasury officials said this meant a final decision on the bank's fate would come swiftly after its own February 4 deadline for bidders.

Northern Rock is estimated to owe the Bank of England about 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.

"This is a perfectly good solution to the Northern Rock problem, but may have significant further ramifications for other lending institutions," said Simon Maughan, analyst at MF Global, referring to other lenders who may want to issue bonds but are not backed by a government guarantee.

He said the financing was good news for shareholders as rescue proposals such as Virgin's can be sweetened, based on the prospect of cheaper borrowing costs for Northern Rock, feeding through to higher profitability.

Responding to press reports that Virgin might improve its bid, Branson said on a business trip to India that he had submitted a fair offer, but its terms could still be tweaked.

Olivant said it expected to submit a proposal by the February 4 deadline.

Savers withdrawing cash from Northern Rock contributed to record savings inflows to Britain's building societies last year. They attracted 16.1 billion pounds, almost double the level the year before, the industry said.

Brown came under fresh criticism of his handling of the crisis over the weekend when opposition politicians said Virgin had a favoured relationship, after Branson accompanied Brown on a business trip to China and India.

The Northern Rock crisis contributed to a slump in Brown's poll ratings at the end of last year. A poll last month put the Conservatives 12 points ahead of Labour.