Alistair Darling has outlined to MPs how the government plans to "save" Northern Rock.
The chancellor will announce the sale of state-backed bonds in a bid to attract private investors.
The £25 billion loan from the Bank of England will be converted into bonds guaranteed by the government, to then be sold on to private buyers.
"This new financing structure would only be available for proposals that would protect taxpayers' interests," the Treasury said in a statement.
"This structure would ensure all Bank of England loan facilities to the company are repaid in full, with interest, upfront, as soon as the funds are raised."
Shares in the stricken bank rose 42 per cent as reports of the deal were confirmed.
But opposition politicians warn the plan risks increasing taxpayers' exposure to the bank's difficulties. Analysts estimate taxpayers' exposure will be increased to at least five years under the plan.
The bond rescue plan, which is the brainchild of Treasury advisers Goldman Sachs, still needs approval from the Financial Services Authority and the European Commission.
Speaking to MPs this afternoon, Mr Darling said the embattled lender would benefit from private sector management.
He said the best solution would have been a private sector sale with no government support, but argued this was not possible in the current global economic conditions.
The chancellor confirmed government analysts had told the Treasury there was "no chance" of a wholly private sector deal.
Mr Darling has warned temporary nationalisation remains "an option" if the bond plan fails to attract private buyers.
Northern Rock has attracted three potential bidders, Olivant, a Virgin-led consortium and a standalone bid from the lender's board.
Yesterday the Sunday Times reported the Virgin group was prepared to cut its proposed stake from 54 per cent to 45 per cent in a bid to agree a sale.
The Conservatives have attacked reports of the bond plan, claiming it will not enable taxpayers to reclaim "their" money.
Shadow chancellor George Osborne said: "Gordon Brown is mortgaging the taxpayer to try to get him out of the political hole he's dug for himself.
"It looks like the British people could be billions of pounds in the red for years to come thanks to his economic incompetence."
Following Mr Darling's statement to the Commons, Mr Osborne said the government was taking Britain back to the 1970s.
The Liberal Democrats have in turn attacked the Conservatives for failing to provide any constructive advice on Northern Rock.
Lib Dem economic spokesman Vince Cable has now written a second letter to Mr Osborne asking him to clarify the party's position.
Mr Cable said: "It is frankly ridiculous that a major political party can be in the position where it has no idea what it would do about Northern Rock.
"The Tories' innate fear of nationalisation is nothing more than an embarrassing hangover of Thatcherism."