Tory leader David Cameron warned today it would be a "monumental failure" if Northern Rock was nationalised as the Government came under fresh pressure to secure the stricken bank's future.
Mr Cameron said it "would not be right" for the taxpayer to take charge of the troubled bank and become responsible for billions of pounds in mortgages.
His comments opposed the view of the Liberal Democrats after acting leader Vince Cable said nationalising the stricken lender was the "least worst option".
Northern Rock chairman Bryan Sanderson yesterday admitted the bank's fate would not be sealed until after Christmas, sparking concerns over hopes to secure a private sector future for the group.
Mr Cameron told the BBC Radio 4 Today programme: "What we want is a private sale, but I suspect that the Government is running out of time and running out of money and it may well be that they need to go down the path of nationalisation.
"If it does it will be a monumental failure."
He added: "I don't think it would be right for Government to spend even more taxpayers' money nationalising a bank and suddenly becoming responsible for £100 billion of mortgage lending."
But in a letter to the Prime Minister, Mr Cable urged the Government to introduce a bill in Parliament before Christmas to allow the bank to be taken into public ownership.
"We are facing in practice two pretty unpalatable alternatives, which is letting Northern Rock go into administration, which would mean that the taxpayer would lose a lot of money, the company would be wiped out, including most of its jobs. The Government would have to stump up a deposit guarantee," he told Today.
"The alternative, which isn't attractive, I stress, but is the least worst option, is to take the thing into public ownership. I have written to the Prime Minister about this and time is of the essence.
FSA bosses also came under fire from MPs today for its role in the Northern Rock fiasco, with the City watchdog's bosses facing their second grilling by the Treasury Select Committee. FSA bosses argued that the run on Northern Rock could potentially have been avoided had the scheme set up to protect depositors been more straightforward and transparent.
Sir Callum McCarthy, chairman of the FSA, told the Commons committee that it "would have been a real help in avoiding the retail run" had the scheme been set up in a less complex way, mirroring the system in place in America.
The savings protection scheme has been criticised in the wake of the Northern Rock fiasco over its failure to guarantee 100% of depositor funds and fuelling panic among worried savers.
Initially under the scheme, only the first £2,000 was guaranteed in full, with 90% of the next £33,000 protected.
The Government was forced to step in and guarantee 100% of Northern Rock deposits to stem the queues of savers rushing to withdraw cash.
The deposit protection scheme has since been changed to cover 100% of the first £35,000 and the Treasury has pledged to overhaul the system.
MPs also expressed surprise at the savings protection scheme funding model, which only levies financial service providers according to potential future failures in the market.
Appearing alongside the FSA bosses, Loretta Minghella, chief executive of the Financial Services Compensation Scheme - which looks after the savings protection scheme - told committee members that while they levy for failures based on forecasts they had not taken account of potential problems at Northern Rock.
Liberal Democrat MP John Thurso asked: "So what confidence can we therefore have in your forecasts?"
The City watchdog faced further criticism over its failure to spot risks in Northern Rock's funding model sooner.
FSA chiefs told MPs in October that "lessons needed to be learnt" and insisted today it was reviewing its supervisory procedures in light of the crisis.
It also emerged in the meeting today that Northern Rock will have to publish its delayed trading statement this month in order to fulfil its stock market listing conditions.
The bank had been due to update the market at the beginning of December, but has so far remained tight-lipped on an exact date to release the statement. The period for pre-close updates normally runs until mid-December.