Mr Darling was talking to MPs after setting out a proposal to turn the firm's £25bn Bank of England loan into bonds and sell them to investors.

The bonds would be guaranteed by the government to speed up a private sale.

If a private sale is not reached, the bank will come under temporary public ownership, the chancellor reiterated.

Either way, savers' money will be protected by the government. Northern Rock shares ended 46% higher at 94.25 pence.

"The proposal that I set out today for a solution to Northern Rock - which is underpinned by Government support - is one which best meets our objectives of protecting taxpayers and depositors and maintaining financial stability," Mr Darling told the House of Commons.

Bidders have until 4 February to come forward with rescue proposals based on the Treasury's plans.

The scheme was proposed by investment bank Goldman Sachs and was given the green light by Prime Minister Gordon Brown over the weekend.

No British government has ever provided financial help on that scale to a business

Robert Peston,

BBC business editor Read Robert's thoughts in full

Peston interview

In effect, it turns Northern Rock debt into government bonds or gilt-edged stock.

That would mean the taxpayer would be exposed to Northern Rock for a much longer period than planned, for five years or longer, analysts said.

The Treasury's plan still needs to be approved by the Financial Service Authority (FSA), and to satisfy the European Commission's rules on state aid for companies.

'Unprecedented'

"The scale of the financial support the Chancellor has today promised to provide to Northern Rock is breathtakingly large and without precedent," said the BBC's Business Editor Robert Peston.

"No British government has ever provided financial help on that scale to a business."

Banks in general found it harder to get funding after the credit crunch last summer, but Northern Rock was harder hit than others.

Its business model relied on the wholesale credit market to raise money - mainly by selling mortgage debt in the form of bonds.

But after significant losses made by investors in loans to US homebuyers with poor credit history, financial institutions became reluctant to buy mortgage debt.

This is a perfectly good solution to the Northern Rock problem

Simon Maughan,

analyst at MF Global

Read Chancellor Alistair Darling's statement in full

Following Mr Darling's statement, Shadow Secretary George Osborne said: "This is a part nationalisation because the government takes the bulk of the risk and the private sector takes the bulk of the upside."

Vince Cable, the Treasury spokesman for the Liberal Democrats, said outright nationalisation would have been a better and more transparent option than what was being proposed.

Conservative Treasury spokesman, Philip Hammond, earlier told the BBC that the government's plan didn't appear to have taxpayers' interests at its heart.

"What we're seeing here is a package which is actually designed to save Gordon Brown's face by postponing the moment of reckoning," he said.

Sustainable future

Mr Darling said putting the plan into practice depended "entirely on the terms on which a deal can be struck".

"Northern Rock would need to demonstrate how it can operate sustainably in future without any government support," he added.

Northern Rock's Bank of England loan facility will be extended until 17 March to allow time to examine the proposed financing structure with Northern Rock and interested parties.

At the moment there are three front-runners: Olivant, the consortium led by Virgin, as well as the Rock's current board, which is developing its own standalone plan.

Olivant chairman Luqman Arnold said: "We have always said our plan seeks to find common ground between all stakeholders in Northern Rock by restoring the fortunes of the company and its brand."

Reports over the weekend said that Sir Richard Branson's Virgin Group was preparing to make an improved offer for the beleaguered lender.

According to the Sunday Times, Virgin is preparing to cut its proposed stake in Northern Rock from 54% to 45%. Such a move would allow existing shareholders more room to share in any recovery in the price of Northern Rock stock.

Public ownership

Observers have said the Treasury's funding proposals could attract other suitors, now that a buyer would not have to shoulder the whole £25bn worth of Bank of England loans.

This had been a key sticking point in a private sale, with Virgin and Olivant unable to secure private loans to pay back this debt in the crisis-hit money markets.

HAVE YOUR SAY Other businesses are not propped up by the government, why should a bank be any different? John Carter, Bristol

"This is a perfectly good solution to the Northern Rock problem," said Simon Maughan, an analyst at MF Global.

Robin Ashby, head of the group representing Northern Rock's small shareholders, said he bought shares in the bank earlier as a vote of confidence that a deal could be done under the new funding arrangements.