THE Government came in for renewed criticism after unveiling funding guarantees for Northern Rock as fears of recession wiped billions off the stock market.

The bank's £24bn taxpayer debt will be split into Government-backed bonds and sold to investors as a ''back stop'' to fund a private sector rescue

Chancellor Alistair Darling said the Government-backed bonds were necessary because bidders, including Sir Richard Branson's Virgin and the Olivant investment group, had struggled to raise funding following the credit crunch.

Mr Darling said: ''In the current market conditions a purely commercial solution was not possible.''

But as the Chancellor laid out the rescue plan, the FTSE 100 Index of biggest companies fell by 5.5 per cent - the largest fall since September 11, 2001 - amid fears of a US recession.

But shares in Northern Rock were one of the few bright spots, climbing 46 per cent on news of the latest move.

The difficulty of borrowing billions during a credit crunch is what has forced the Government to agree the latest Northern Rock rescue plan.

But Shadow Chancellor George Osborne said the company's loans and guarantees - totalling £55bn - amounted to a £2,000 ''second mortgage'' for every family in the country to ''rescue the reputation'' of the Government.

Liberal Democrat Treasury spokesman Vince Cable called it a ''private sector solution without private sector money'' and added that the taxpayer was ''being taken for a very, very big ride''.

But the Chancellor said a private sector rescue was preferable to administration and a firesale of the group's mortgage assets, although ''not at any cost''.

Nationalisation is still on the table if a deal cannot be agreed.

''If it does not prove possible to secure a proposal that meets our stated objectives and conditions, it would be necessary to take Northern Rock into temporary public ownership,'' Mr Darling said.

The Chancellor said the proposals best met the three aims of protecting depositors, taxpayers, and ensuring wider financial stability.

Shareholders, who could have been virtually wiped out by nationalisation, welcomed the proposals.

Robin Ashby, of the Northern Rock Small Shareholders' Association, said: "I think this is a sensible idea from the Government, from whom we have already had a lot of bluster and threats.

"It is clarity at last and is a good platform for the people who have got the most realistic chance of putting forward proposals for Northern Rock.

"I hope now it enables the people who want to bid to push on with their proposals so we have something real on the table and so we can get on with the restructuring of the business.

"It also gives it five years or so for the market to sort itself out and get back to normal."

Roger Lawson, of the UK Small Shareholders' Association, said: "We are generally positive about the announcement which effectively provides a way forward for the company and it looks like the threat of nationalisation has been reduced.

"However, the general tone of the announcement is very dictatorial because the back-up is a threat of nationalisation.