The European Union will on Wednesday approve Britain's plan to break up failed bank Northern Rock, paving the way for a split in early 2010 and the eventual sale of parts of the bank, a source familiar with the situation said.

The British government nationalized Northern Rock in early 2008 after it became the first major British victim of the credit crisis.

The split will produce a good bank which will deal with retail deposits, retain Northern Rock's healthy assets and deliver new loans and a bad bank which will remain under state control to win down the loan book.

The split will see a new, healthy bank created in early 2010, the source said. This new bank will be attractive to new entrants who are keen to establish a foothold in the UK banking market.

The source said once the bank was split the authorities could look at an eventual sale which will need to promote greater competition in the UK.

The government has repeatedly said it would only sell its stakeholdings in the banking sector -- including stakes in Lloyds and RBS -- when market conditions were favorable to ensure a good deal for the taxpayer.

The EU is expected to make statements on what divestments may be possible at RBS and Lloyds in the coming weeks as part of their state aid process.

Favorable decisions for those two banks could produce three new British banks -- the healthy part of Northern Rock and divested areas from RBS and Lloyds -- within the next few years.