The British government decided to help Northern Rock PLC under the European Union support.
The approval from the European Commission for the state aid that kept Northern Rock afloat after it fell victim to the global credit crisis - estimated by analysts to be as much as 29 billion pounds (US$58.8 billion; 39.95 billion EUR) - has likely boosted the prospect of a deal being reached with a private buyer.
The government's Treasury department and Northern Rock managers have been engaged in talks for several weeks with potential purchasers.
A consortium led by Richard Branson's Virgin Group has been picked as a preferred bidder, but other bidders, including U.S. private equity firms J.C. Flowers and Cerberus and British investment group Olivant, remain in the running.
"All options are on the table, but we are trying to find a private buyer," Prime Minister Gordon Brown told lawmakers during the a weekly question session in Parliament after the EU ruling. "Any settlement with any potential buyer will insist that public funds are properly protected."
The Daily Telegraph newspaper had reported that the government had already ordered its legal experts to draft a law allowing Northern Rock to be nationalized if its attempts to sell the bank failed.
Northern Rock ran into trouble in September when short-term money markets dried up following the collapse of the U.S. subprime mortgage market. Heavily reliant on funding from those markets, Northern Rock approached the Bank of England for an emergency loan.
As spooked customers made a run on the bank to retrieve their savings, the government also announced it would guarantee all personal funds held by the lender up to 35,000 pounds (US$70,900; 48,100 EUR).
That package of loans and deposit guarantees needed approval from the EU, which allows certain forms of emergency aid for a limited period of up to six months.
The EU said on Wednesday that the central bank's initial loan on Sept. 14 was not considered state aid. The deposit guarantee and further assistance with a Treasury indemnity was considered aid, but was deemed legal.
"We came to the conclusion that the measures are in full conformity with guidelines on rescue aid," said Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes.
Todd said the total support in question was "in the region of tens of billions of pounds," but declined to be more specific.
Casting some shadow over the positive news, however, the EU withheld any decision on future aid, including any writeoff of debt.
"Any such measures would have to be assessed on their own merits," it said.
The EU said the British government had promised to give the Commission a restructuring plan for Northern Rock, Britain's fifth-largest mortgage lender, by March 17.
Leading contender Virgin proposes to re-brand Northern Rock as part of the Virgin Money business and said its consortium would repay 11 billion pounds (15.3 billion EUR; US$22.7 billion) of the Bank of England funding on the completion of the transaction.
Vince Cable, the acting leader of the opposition Liberal Democrat party, said that the loan to Northern Rock had almost reached the level of the annual defense budget.
"What guarantees have you received that this money will be fully repaid beyond the vague assurances offered by Mr. Branson and the assorted collection of hedge fund sharks who are behind him?" he said.
Northern Rock shares fell 2.9 percent Wednesday to 100 pence (US$2.03; 1.38 EUR) on the London Stock Exchange.