The European Commission on Wednesday approved a restructuring of the the nationalised UK bank Northern Rock that will lead to it being split into two and the “good” parts of the business sold off.

The Commission said that the plan to break up the bank was compatible with EU rules on state aid.

It was “satisfied” that the package of measures proposed by Northern Rock would restore the long-term viability of the “good” bank and allow orderly liquidation of the “bad” bank, without unduly distorting competition.

The restructuring provides that Northern Rock’s market share will be less than half of its pre-crisis level.

Northern Rock’s retail deposits and low-risk mortgage loans will be separated into a "good" bank and sold off. Its other mortgage assets, including those held in its Granite securitisation programme, will be put into a separate asset company or “bad” bank, that will remain under government control.

The UK government hopes to be able to sell the good parts of the bank in 2010.

The EU is examining government bailouts across Europe to ensure state aid doesn’t give some banks an unfair advantage. On Monday, Dutch financial group ING Groep NV was forced to to split itself in two to win consent for its rescue.

In the UK,  Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, the two biggest banks owned by the UK government, may also be forced to sell assets and branches by the EU.

In Ireland, the former builders' bank, Anglo Irish, which was nationalised earlier this year, is also likely to be broken up to prevent it getting an unfair market advantage.

Competition Commissioner Neelie Kroes said today: "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’s investigation found that the aid package in the UK's revised restructuring plan was kept to a necessary minimum. The UK Government financial support includes recapitalisation measures of up to £3 billion, liquidity measures of up to £27 billion and guarantees covering several billions of pounds of liabilities. The Commission also concluded that the restructuring is capable of restoring the 'good' bank's long-term viability as it will have only limited exposure to Northern Rock's risky past lending.