By Robert Peston
BBC business editor
The Virgin-led consortium has been told by the Treasury that it is the frontrunner to take control of Northern Rock, the BBC has learned.
Northern Rock got itself into financial difficulty last year
Yet at present, the Treasury sees nationalisation of the troubled bank as a better outcome for the taxpayer.
As a result, Sir Richard Branson's Virgin Group has been told to improve the terms of its rescue plan.
The Treasury wants Virgin to offer more for the billions in financial support being provided by the government.
And it also wants a bigger potential stake in Northern Rock for the taxpayer, via a so-called warrant over the bank's shares.
A rescue plan put together by Northern Rock's management has not been killed off.
But the Treasury has told the management team that its current proposal is significantly inferior to that put forward by Virgin.
The disclosure will be a bitter blow to the Rock's shareholders - many of whom are very hostile to the Virgin proposal.
They believe the management's plan offers the best prospects of rebuilding the value of the bank's battered shares.
But what may alarm shareholders even more is that if the decision on what to do about the Rock were taken today, the Treasury would opt for full public ownership.
According to a banker close to negotiations, the prime minister is calling the shots on what to do about the bank, and is steeling himself to go for nationalisation.
Gordon Brown still hopes that a partial nationalisation deal with Virgin or the Rock management team can be negotiated.
But he is said to be no longer seeking to avoid nationalisation at any price.
"Nationalisation is looking much more likely than it did," said the banker.
Sir Richard Branson's Virgin Group and Northern Rock's own board both made rescue offers for the bank by the Treasury's 4 February deadline.
Northern Rock got itself into financial difficulties last year because its business model left it ill-prepared for the global credit crunch.