City backs Branson's package to save Rock

In total, the rescue package revealed today is worth more than £12.5 billion, although it values Northern Rock's equity at just £105 million.

Virgin's consortium includes London hedge fund Toscafund, Hong Kong finance group First Eastern Investment Group and US distressed-debt investor Wilbur Ross. Funding is expected to come from Royal Bank of Scotland and Citigroup.

Shares in Northern Rock crashed 9.8p on opening today, before recovering to be up 4p at 90p as hedge funds skewed the market. The price Virgin is prepared to pay to take control of the crisis-torn bank is 25p a share - just 2% of their value at their peak last February when they hit 1251p.

Northern Rock told the Stock Exchange that Virgin is now its preferred bidder, but left the door ajar for rivals to improve their offers.

Northern Rock chairman Bryan Sanderson said: "This is very good news for Northern Rock. Over the last few weeks and months, we have looked at the issues from the perspective of all stakeholders. I am pleased that a solution that firmly restores the company's prospects has been identified."

Virgin intends to inject £1.3 billion of new capital into the bank through a heavily discounted rights issue that could leave original shareholders with around a third of the enlarged equity.

Virgin said it will put up half the £1.3 billion itself, but is looking for the other half to come from existing investors.

In case they do not find that attractive - a strong possibility - the rights issue will be fully underwritten.

Should shareholders take up their rights, Virgin would end up with a 55% controlling stake in the business. If they do not, that stake could rise.

Branson will also inject Virgin Money, said to be worth about £250 million, into Northern Rock. Virgin Money would become the brand name for the merged businesses.

At the same time, Virgin will repay £11 billion of the £22 billion of emergency loans that Northern Rock has taken out from the Bank of England.

Although this is some £4 billion less than the repayment offered by US private-equity firm JC Flowers, the Virgin bid is more acceptable to both the Northern Rock board and the Treasury because it leaves more for existing shareholders. Flowers has been told to see if it can come up with a revised bid that offers more for existing investors.

Northern Rock will have to put the Virgin plan to its investors, and is also studying the legitimacy of a call from rebel shareholders - thought to include RAB Capital and Jon Wood's SRM, which together own 13% of the shares - for an extraordinary general meeting where they would try to stop the bank selling more than 5% of its assets.

Virgin has been told that Northern Rock will cover up to £5 million of expenses, including its advisory fees to the banks.