Britain would prefer a private sale of Northern Rock, Prime Minister Gordon Brown said on Wednesday, as officials played down a report that the government could nationalize the battered mortgage lender.
"All options are on the table but we are trying to find a private buyer," Brown said, adding that it was important for the stability of the economy that the lender is rescued.
The prospect of a deal was also boosted by clearance from European Union regulators for the rescue aid the government has provided to the bank, a significant local employer in its home city of Newcastle.
Britain's Treasury has for weeks been involved in talks to sell Northern Rock, Britain's fifth-largest mortgage bank, which is estimated to have borrowed as much as 29 billion pounds ($59 billion) from the Bank of England since mid-September after failing to raise funds in wholesale markets.
The Daily Telegraph reported on Wednesday that the government had already drafted a bill to nationalize Northern Rock and was hoping to win bipartisan support for the bill. The move was a "fallback option" should the sale plans fall through, the paper said.
Northern Rock also signaled it is confident an auction will result in a deal.
"All parties remain committed and confident of a successful outcome for the company," a spokesman said. Retail depositors remained protected and "the government has guaranteed that savers' money is safe whatever options Northern Rock pursues," he said.
A consortium led by Virgin Group has been picked as a preferred bidder, but it is competing with other suitors, including U.S. buyout firms J.C. Flowers and Cerberus and investment group Olivant.
Virgin remains the favored option but advisers continue to talk to other bidders to fine-tune their proposals, one person familiar with the situation said. J.C. Flowers submitted a revised offer last week, and Olivant is expected to refresh its proposal before Friday.
Northern Rock's volatile shares fell over 7 percent in early trade on concern nationalization may occur, but they pared losses and were down 2.9 percent at 100 pence.
Traders and analysts said nationalization -- the government taking on the running of the bank and assuming responsibility for its assets -- could take years and leave the government open to messy litigation.
"What a can of worms that would be. With all the red tape and legalities involved it would take three years to nurse it out of that particular sick bay and who wants trashed and shop-soiled goods," David Buik of BGC Partners said.
The European Commission, which has broad powers to regulate state aid, said emergency funding from the Bank of England from mid-September did not constitute state aid because it was secured by collateral and was interest-bearing.
Subsequent government moves to guarantee deposits and provide liquidity and guarantees secured by a Treasury indemnity did constitute state aid, but can be authorized as rescue aid in line with EU guidelines, the Commission said in a statement.
A Treasury spokesman welcomed the "swift" decision and said the government would work with the Commission to maintain compliance with the state aid guidelines.