The European Commission has approved the Government's plans for splitting Northern Rock in two - a "good" bank and a "bad" bank.
The "good" bank will continue Northern Rock's economic activities, while the "bad" bank will become in effect an asset management company running down the remaining toxic assets.
Prime Minister Gordon Brown now plans to sell off the former and keep the latter under state control.
Approval of the split under EU state aid rules, including another Government cash injection, was announced by Europe's Competition Commissioner Neelie Kroes, who said: "The failure of Northern Rock would have had major detrimental effects on the UK mortgage market and the overall financial stability of the UK economy.
"Important structural changes, including the split of the bank into two entities and a significant reduction of its market presence, will allow the bank to become viable in the long-term and limit distortions of competition.
"This decision demonstrates once again that the EU's state aid rules provide an appropriate framework to allow state support for a sustainable restructuring of banks without giving individual banks an unfair competitive advantage."
The Commission has kept the Government waiting for months for a decision, resisting requests from Chancellor Alastair Darling last June for a swift ruling. An earlier emergency rescue package was speedily dealt with, and now, finally, Brussels has praised the longer-term aid plans as having been "kept to a necessary minimum".
The Commission said the restructuring measures would "correct the excessive expansion of Northern Rock pre-crisis", and the bank's market share will be less than half of the pre-crisis level".
"This limits competition distortions in the UK market created by the economic advantage the bank received through the state support."
Meanwhile, the 'bad' bank (the asset management company) will run down the past loans over the long term and "eventually be liquidated".
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