According to ministers, up to $6 billion of extra share capital is to be provided to the bank, in order to further strengthen its balance sheet.
The capital increase follows Northern Rock's latest profits declaration, which announced over $1 billion of losses at the firm for the first half or the year.
Rising numbers of mortgage delinquencies among customers, along with a $140 million financial hit due to asset writedowns, were blamed for the loss.
UK chancellor Alistair Darling, along with Northern Rock's chairman Ron Sandler, defended the debt-for-equity move - saying that it was important to safeguard the business from the financial pressures of the credit crunch.
Last summer, Northern Rock became the first high-profile victim of the global crisis, when it admitted that it was finding it difficult to raise revenue on the crunch-hit money markets.
It was then subject to the first bank run experienced in Britain for over a century - before the government stepped in to save the firm from collapse.