Northern Rock suitor Olivant last night withdrew from the race to rescue the crisis-hit bank in a shock 11th-hour decision.
The investment group, headed by former Abbey chief executive Luqman Arnold, said it had failed to come up with an offer that could satisfy its investment needs, the Government's financing terms and the interests of Northern Rock stakeholders.
Its decision to pull out, which came as the deadline for final bids was due, leaves just two likely rescuers - the Virgin-led consortium and the bank's own management team.
Virgin confirmed it had lodged a formal takeover proposal, with aims to rebrand Northern Rock as Virgin Bank.
The bank's board also announced it had put forward a "self-help" bid to keep the bank as a standalone entity, but in a restructured and slimmed-down form.
News of Olivant's decision not to make a rescue attempt may disappoint investors, given that the group was widely seen as the shareholder favourite.
But Virgin said its proposal offered a "sound" solution for the troubled Newcastle lender that would protect taxpayers interests and give shareholders the chance to invest further in the group at the same price as the consortium. It did not reveal how much equity it would take in the bank if its bid succeeds, which has been a contentious issue.
It is thought that shareholders were unhappy with its initial bid plans to take a stake of up to 55 per cent and Virgin had reportedly been planning to cut this to 45 per cent in the final bid.
Virgin Money boss Jayne-Anne Gadhia, who has been lined up by the consortium to head Northern Rock as chief executive should the bid win through, said: "We believe our proposal meets all of the Tripartite Authorities' announced objectives.
"In particular, taxpayers' interests are protected and we have a clear strategy for repayment of the proposed financing package arranged by the Bank of England and HM Treasury and for release of the Treasury's guarantees.
"We have also worked hard to see that the proposed financing package can meet the European Commission's requirements to permit restructuring aid. And we propose to maintain a meaningful participation for the charitable Northern Rock Foundation in the profitability of the revitalised and rebranded company."
Virgin said it aims to inject £1.25 billion of new equity into Northern Rock, with £500 million being raised through offering shareholders new shares at 25p each.
But it did not dis-close any details of the impact on Northern Rock's 6,500-strong workforce. Northern Rock's board, meanwhile, outlined a two-pronged turnaround plan for the bank, although it too remained tight-lipped on potential job losses.
It said it would seek to raise at least £500 million, reduce the assets on Northern Rock's balance sheet and reorganise the operations. Phase one would see the bank stabilised and the management team strengthened, with Paul Thompson - a former boss of insurer Resolution - appointed as chief executive.
It said it would also prioritise the payment in full of the bond funding proposed by the Treasury to refinance Northern Rock's loans from the Bank of England, said to be about £24 billion.
Phase two would see Northern Rock return to modest growth of lending, according to the group's board. "The board believes the restructuring proposal, once implemented in full, will result in an independent, well-capitalised, low-cost and significantly lower-risk mortgage and savings bank," said the bank's board.
Shares in Northern Rock dropped eight per cent in late trading yesterday on news of Olivant's decision to pull out, reversing an earlier rise of ten per cent. They closed 8p down at 88p.
Any potential deal must be approved by the "Tripartite Authorities" comprising the Treasury, Financial Services Authority and the Bank of England, which are likely to decide on a preferred bidder by the end of February.
Northern Rock had a stock market value of around £5.3 billion a year ago but it is now worth less than a tenth of that figure. Liberal Democrat Treasury spokesman Vince Cable called on the Government to ensure taxpayers get value for money from the successful bidder.