Nationalisation moved a step closer for Northern Rock yesterday after the UK Treasury extended guarantees to the stricken bank.

UK taxpayers are in effect guaranteeing exotic instruments at Northern Rock such as covered bonds - an ultra-safe bond - and derivatives that are not backed by mortgage collateral.

Granite, Northern Rock's securitisation programme that accounts for 40 per cent of the bank's balance sheet, will be excluded from the new guarantee.

The government said in October that it would provide cast-iron guarantees to all Northern Rock's retail savers and for wholesale deposits and borrowings.

Yesterday's additional guarantee means the government has become even more deeply involved in the Northern Rock crisis.

Sir John Gieve, deputy governor for financial stability at the Bank of England, told the Treasury select committee yesterday: "Essentially, this does widen the scope of the guarantee to pretty much the whole balance sheet excluding the capital and the Granite securitisation. All that guarantee is secured against the asset value of the company."

Mervyn King, governor of the Bank of England, said about 40 per cent of Northern Rock's £114 billion balance sheet related to the Granite programme.