It will take more time to sell the "bad" part of Northern Rock
The European Union (EU) has approved plans for nationalised bank Northern Rock to be split in two - paving the way for a partial sale.
One business, described as the "good" bank, would hold savers' money, carry out new lending and hold some existing mortgages.
A second "bad" bank would be set up to hold the rest of the mortgages and repay outstanding government loans.
Northern Rock said the EU's approval was "an important and positive step".
It added that it was "business as usual" for customers.
However, critics fear that the taxpayer may still be left with losses, racked up from the assets that remain with the bad bank.
The restructuring is expected to take place by the end of the year.
By Hugh Pym, Chief economics correspondent
The background to all this is the commission's desire to restore something like a normal playing field for banking.
Taxpayer-funded bailouts saved the banking system a year ago but left the sector distorted by state aid and government guarantees.
The commission wants to substantially reduce the scale of state-supported banks.
While the good bank would eventually be sold to a third party, the bad bank would run down its remaining assets and eventually be liquidated, the EU said.
The sale of the good bank could potentially be completed before the general election next year.
Revenue from the sale would be returned to the taxpayer.
Among those named as potential buyers are Virgin and National Australia Bank - owner of the Clydesdale and Yorkshire Bank.
The EU said the decision would allow the good bank to become viable in the long-term.
"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," EU Competition Commissioner Neelie Kroes said.
European Commission spokesman Jonathan Todd said there would be caps on the good bank, for as long as it is in public ownership.
• A balance sheet reduced to about a quarter of the size of Northern Rock's balance sheet before the crisis
• It will not be able to be the market leader in terms of interest rates on loans
• A cap on its lending to one-third of Northern Rock's 2008 levels
• A cap on its retail deposits of slightly less than the pre-crisis level.
The Building Societies Association (BSA) - which has already called for the Northern Rock to be re-established as a mutual owned by its savers - said the government's plan would continue to give the bank an unfair advantage.
"The 100% government guarantee on Northern Rock's retail deposits should now be removed," said the Adrian Coles of the BSA.
"Until this happens, we strongly believe that Northern Rock should pay a fee to the government for the benefit of this guarantee."
The EU launched an investigation into Northern Rock in April 2008, two months after the bank was nationalised.
STORY SO FAR...
Up until a couple of years ago Northern Rock's mortgage book was expanding rapidly and it was the UK's market leader in terms of new policies sold
But in September 2007 the BBC revealed that Northern Rock had been granted emergency financial support from the Bank of England, after falling foul of the crisis in global financial markets
The bank was formally nationalised in February 2008
The UK government's plan to split Northern Rock into a "good" bank and "bad" bank has now received EU approval, paving the way for a sale of its "good" assets to a third party
To date, Northern Rock has received taxpayer loans totalling £27bn, of which it has repaid £12.5bn. However, it will receive another £8bn when the bank is split
The investigation found that the aid package the UK government provided was kept to a "necessary minimum".
Total taxpayer support for the bank has amounted to £26.9bn, although it had repaid almost half of that by 30 June.
It will receive a further £8bn of government loans when the restructuring goes through by the end of the year.
The EU added that the restructuring would "correct the excessive expansion of Northern Rock pre-crisis" and would reduce its market share to less than half of the pre-crisis level.
In a statement, the bank said: "This approval is an essential requirement of the planned legal and capital restructure, which is central to the business plan for Northern Rock."
"The restructure will strengthen the capital and liquidity position of Northern Rock significantly, and offers value for money to taxpayers."
Speaking ahead of the EU's announcement, the chairman of the Treasury Committee, John McFall, said he thought the decision to split Northern Rock was a good one.
"It provides a healthy bank, and it provides confidence to the market and it's a good signal," he told the BBC.
But the Liberal Democrat Treasury spokesman Vince Cable said he was "deeply suspicious" of the move.
"I fear that what might come out of this is that the better bits of the bank will be sold off and sold off cheaply to a private buyer, and the rubbish - the really bad irresponsible loans, the 125% mortgages - they will be left with the taxpayer which will eventually accrue very large losses," he said.
Meanwhile, the European Commission said it did not know when it would be taking a decision about the future of Lloyds and Royal Bank of Scotland (RBS).
Reports in recent months have suggested that Lloyds - which bought HBOS at the height of the crisis - will spin off its Cheltenham & Gloucester business, while RBS is expected to separate out its old Williams & Glyn brand.
Ministers are thought to want more competition in the market, believing the sector is too dominated by Barclays, HSBC, RBS and Lloyds.
Even if the UK government did not act, the European Commission may force Lloyds and RBS to spin off some of their subsidiaries in an attempt to prevent banks that are being propped up by state aid from having too much of a stranglehold on the market.
If RBS and Lloyds did have to sell off some of their branch networks, it could lead to an "interesting shake-up" of the banking system, the BBC's chief economics correspondent Hugh Pym said.
New players such as Tesco or Virgin could enter the market, increasing competition, he said.