The European Commission has granted clearance for the UK Government's rescue aid for Northern Rock, which is thought to have debts of up to £30 billion.

However, the Treasury will need to return to the Commission on March 17 if a restructuring plan for the bank requires further state funding.

The Commission said that the Bank of England's initial emergency funding to Northern Rock on September 14, when the mortgage lender's troubles first emerged, did not constitute state aid.

However, it said that guarantees subsequently given to Northern Rock's depositors and "the revised and extended measures taken by the Bank of England on October 9 with the addition of a Treasury indemnity" are state aid but are considered to be in line with the rules on rescue aid.

Reports today suggested that the Treasury is putting together a draft Bill to nationalise Northern Rock as a last resort if a viable takeover plan fails to materialise by February.

The Treasury declined to comment on whether it was drawing up plans to nationalise Northern Rock, stating only that the Government was focusing on the current sales process.

Gordon Brown told the Commons today: "It is important for the stability of the economy that Northern Rock is rescued."

He said that "all options are on the table" but the Government was trying to find a private buyer for the bank.

A Virgin Money-led consortium is still the preferred bidder to rescue Northern Rock, although other proposals are expected to emerge by the Treasury’s deadline on Friday.

Shares in Northern Rock today fell back through £1 as speculation gathered pace that the mortgage lender faces nationalisation if the Treasury fails to find a suitable buyer. The shares fell 3.79 per cent to 99.1p, valuing the Newcastle-based bank at £417 million. They had hit a low point of 84.1p on November 22.

The Treasury said: "The Government welcomes this swift decision from the Commission, which is the result of the authorities on both sides of the Channel reacting responsibly and quickly to events.

"We will continue to work with the Commission in considering the options for the company, identifying a solution which meets the Government's principles and maintains compliance with the state aid guidelines."

The Treasury had been reported to be in talks with the Opposition to gain support for a nationalisation plan. However, the Conservative Party said today that it had not been approached by the Government and was not in talks about a nationalisation plan.

George Osborne, Shadow Chancellor, said: “I am always happy to talk to the Chancellor about the future of Northern Rock and how best to safeguard taxpayers’ money. I sent a letter on 20th September telling Alistair Darling that, but I still haven’t had a reply.

"And contrary to newspaper reports, the Conservatives have had no contact from the Government about any legislation concerning Northern Rock. But we are here and ready to listen.”

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