The company says it is selling two power stations to rival companies for more than £1bn ($1.6bn) to take advantage of what it said were "attractive valuations" on offer.
The plan also involves the return of up to £600m ($970m) to shareholders.
The widely expected demerger by the troubled one-time flagship of privatised UK power generation will add to speculation that one or both of the demerged operations will fall victim to a predator in the consolidation frenzy gripping the industry worldwide.
Tough UK market
Earlier this year, National Power lost investor confidence as its strategy for dealing with tightly squeezed domestic earnings appeared to falter.
A strategy review was announced following the resignation of its chief executive, Graham Henry, in February, and is the result of investor pressure to realise shareholder value.
The chairman, Sir John Collins, said: "The board considers that the proposed demerger represents the best way forward for the company and for our shareholders.
"The UK and international operations have different characteristics and are increasingly running independently of each other. It is now the right time for them to be established as highly focused individual entities."
Dividend
Demonstrating the difficulties it has faced raising international earnings to match the squeeze on its regulated domestic business, the group fulfilled last year's commitment to cut its dividend.
It recommended a year to March 2000 pay-out of 15 pence, down from 19p a year ago.
The demerger, capital return and dividend cut were widely predicted by analysts, but the two power station sales were being seen as a surprise.
The markets reacted favourably to the plan, with National Power's shares rising strongly in early trading.
National Power will sell its gas fired power station at Killingholme, North Lincolnshire, and its coal-fired station in Eggborough, North Yorkshire.
The Killingholme station is being bought by US-based NRG Energy for £410m and the Eggborough station by British Energy for £640m.
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