The conversion of Northern Rock's £25 billion Bank of England debt into Government-guaranteed bonds has been backed by the Chancellor, Alistair Darling, after gaining approval from the Prime Minister, Gordon Brown.

If the plans are passed by both the Financial Services Authority (FSA) and the European Commission (EC), the debt will be wrapped up by investment banking firm Goldman Sachs, which initially proposed the solution.

There are currently three bids for a private-sector deal, investment company Olivant, Richard Branson’s Virgin Group and an in-house solution under new Northern Rock management, although, it is believed that other suitors will put forward a bid now that they won’t have to shoulder the entire £25 billion debt to the Bank of England.

A deadline of 4 February was put on bidders to put forward their proposals.

If none of the bids are accepted, the Government has said that it will be forced to nationalise Northern Rock.

Shares in the crisis-hit Rock rocketed by just over 42 per cent following the announcement, to 92p.