The Treasury will sell nationalised lender Northern Rock to Virgin Money, the banking arm of Richard Branson's Virgin group, in a loss-making deal that starts the government's exit from the banks it bailed out in the 2008 crisis.

The disposal, five months after Chancellor George Osborne formally put Northern Rock up for sale, will fetch between 747 million pounds and 1 billion pounds, the Treasury said on Thursday.

That represents a loss of at least 400 million pounds on the 1.4 billion pounds in equity pumped into the lender by taxpayers.

The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks, Osborne said in a statement.

Virgin Money, partly backed by U.S. private equity tycoon Wilbur Ross, will scrap the Northern Rock brand next year, and aims to float the combined business as early as 2014, Chief Executive Jayne-Anne Gadhia told Reuters.

Virgin Money saw off competition from rival bidders including NBNK, a takeover vehicle run by former Northern Rock boss Gary Hoffman, which aims to create a new bank by buying assets from bigger operators who are scaling back.

UK Financial Investments (UKFI), the body that manages the government's stakes in bailed-out banks, said it had backed Virgin Money's bid because it offered the best deal to taxpayers.

MORE BUYERS WANTED

But the government is no closer to selling its biggest bank holdings, an 83 percent stake in Royal Bank of Scotland and a 41 percent slice of Lloyds Banking Group.

There's no further update that we have to give today, said Keith Morgan, UKFI's head of wholly owned investments.

These are completely different situations. I'm not sure you can really compare (Northern Rock) to the wider situation of RBS and Lloyds.

A steep sell-off in banking stocks triggered by the eurozone sovereign debt crisis has left RBS and Lloyds shares trading at less than half the average prices paid by the government for its stakes, blocking efforts to offload them.

Taxpayers are sitting on a combined loss of 40 billion pounds on their 65 billion pound investment in RBS and Lloyds holdings, with a sharp share price fall reducing it by 1 billion pounds on Thursday alone.

The combination of Northern Rock and Virgin Money should increase competition in British retail banking, challenging the dominance of HSBC, Barclays, Lloyds Banking Group, Santander and Royal Bank of Scotland, the Treasury said.

But analysts said the combined group would be too small to shake up the banking market, with effective competition more likely to come from the buyer of 630 Lloyds branches being sold as payback for state aid the bank received during the crisis.

From the government's viewpoint, it's good to have got the deal done, but it'll be longer term before there's any real impact on competition in the market, said Simon Willis, an analyst at stockbroker Daniel Stewart.

NBNK is in the running to buy the Lloyd's branches, alongside mutually owned lender the Cooperative.

Virgin Money, an internet-only provider of savings products, credit cards and insurance, pledged to preserve Northern Rock's workforce and expand its 75-strong branch network, while running the combined group from Northern Rock's existing base in Newcastle.

Virgin Group will own just over 70 percent of the enlarged bank, with Wilbur Ross taking almost 20 percent. Stanhope Investments, a UK firm tied to Abu Dhabi's sovereign wealth fund, will invest 10 percent on completion.

Virgin Money will pay the government an additional sum of between 50 million and 80 million pounds if it carries out a successful stock market flotation in the next five years.

RICHES TO RAGS

Northern Rock, a former mutual that used cheap wholesale finance to grow aggressively in the mortgage market, rose to become Britain's fifth-biggest home loan provider by the middle of the last decade, claiming a place in the elite FTSE 100 share index.

But the group was starved of funding after banks abruptly stopped lending to each other in the 2007 credit crisis, triggering the first run on a British bank in many decades, and prompting the government to step in with emergency support.

Virgin Money was among several companies that expressed an interest in buying Northern Rock during an abortive sale process in late 2007, prior to its full nationalisation in February 2008.

A portfolio of toxic assets sitting on the bank's balance sheet was later spun off into a separate unit, Northern Rock Asset Management, which remains in public ownership, supported by a 20 billion pound government loan.

(Additional reporting by Adrian Croft and Steve Slater; Editing by Paul Hoskins, Jodie Ginsberg and Will Waterman)