Tesco has emerged as a potential bidder for Northern Rock as the Government races to sell the state-owned lender before a general election, The Times has learnt.

The supermarket chain has shown provisional interest in buying the bank nationalised as the credit crisis brought the financial system within hours of collapse. Virgin, which tried to buy Northern Rock at the time, has expressed renewed interest and private equity funds have made inquiries.

Gordon Brown is keen to prove to voters that his rescue worked. If at all possible, he wants Northern Rock returned to the private sector at a substantial profit. Ministers say that he wants desperately to avoid a Conservative government taking the credit.

Whitehall officials told The Times that they “would not be surprised” if the bank were sold before the election.

The Treasury has drawn up a means of separating the good and bad assets to make it more attractive. Northern Rock holds deposits of £19.5 billion and a mortgage book of £66.7 billion. Some of the loans are so toxic that they are likely to stay in public hands.

The Government favours a sale rather than a flotation because it would be quicker. A Treasury spokesman insisted that the disposal of Northern Rock was not driven by political factors: “Any decision will be taken in the best interests of financial stability and of the taxpayer.”

The Government is understood to have ruled out any imminent disposal of Royal Bank of Scotland, in which the State has a 70 per cent stake. Officials said that this would be premature as the European Commission has yet to approve the state aid used to recapitalise the bank. Others say that RBS would be complex to unravel because it has retail, commercial and investment banking interests worldwide.

Officials believe that any formal sales documents for Northern Rock cannot be drawn up until the Commission gives its ruling on whether the plan to split Northern Rock into a “good” and “bad” bank constitutes unacceptable levels of state aid.

Northern Rock has cut costs by reducing staff. In March it owed £8.9 billion on a government loan that stood at £26.9 billion at the end of 2007.

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