Treasury officials are providing up to £3 billion of extra share capital for the recently-nationalised bank to help it cope with increased housing market uncertainty.
The announcement came as Northern Rock reported a £585.4 million loss for the first half of this year amid soaring levels of customers defaulting on mortgage payments.
The capital will be made available through a debt-for-equity swap which will effectively see taxpayers become shareholders in the lender, on top of providing billions of pounds in loans to keep the business going.
Executive chairman Ron Sandler defended the move and said taxpayers would not be any more exposed to the recently-nationalised bank as a result.
In tandem with the economic and housing market slowdown, Northern Rock saw the numbers of homes in its possession soar by two-thirds to 3,710 during the first half of this year, while its bad debt charge more than trebled to £191.6 million.
Mr Sandler warned the external environment had "deteriorated" with the resulting increased credit losses being suffered by its £84 billion loan book.
The proportion of Northern Rock's mortgage accounts more than three months in arrears at June 30 more than doubled during the six months to 1.18%.
Particularly badly hit have been customers who took out the lender's "Together" mortgages, which allowed people to borrow up to 125% of the home value before being stopped in February. Arrears levels for the products more than doubled during the first half to 2.14%.
And in a further sign of customers finding it harder to make ends meet, the lender said it was increasing staff numbers in debt management from 185 to around 500.
But the lender managed to pay down £9.4 billion of Bank of England loans during the six months to leave £17.5 billion outstanding. Up to £3 billion of the outstanding debt will be swapped into shares under the capital scheme.
Mr Sandler defended the £3 billion sum as a "prudent" figure, and countered accusations that it meant taxpayers' backing was open to more risk.
He said: "I think that the taxpayer already clearly has an exposure to this bank.
"We are repaying down the loan and at the end of the day the Government still anticipates that any of the amount transferred into equity will be recouped through the ultimate value of the bank."
He added: "We need to bear in mind that the state aid rules do not allow for a drip feed into the bank. We have selected an amount which we believe is comfortable for the whole period of temporarily public ownership."
Economist Jonathan Loynes, of Capital Economics, warned: "The Government's decision to inject extra capital into Northern Rock means that UK taxpayers will become shareholders in a troubled mortgage lender during what looks set to be the severest downturn in the housing market for decades."
Recent forecasts for house price falls of up to 20% by the end of next year have been made, which could push thousands of homeowners into negative equity and pile pressure on the quality of Northern Rock's loan book.
Northern Rock's first half losses, which compare with £296 million of profits during the same period last year, also included £34 million fees paid to advisers and £37 million of redundancy costs.
Mr Sandler had already warned the bank would make "substantial" losses this year.
But the Government's loan repayments were "well ahead" of target, he said, and the lender remained on track to pay them all back by the end of 2010.
The chairman said: "While the losses reported today are likely to continue as the restructuring proceeds and as the credit environment remains difficult, I am confident that the foundations have been well laid for recovery and return in due course to private ownership."
Chancellor Alistair Darling said the bank was facing a "very difficult time" in common with other banks around the world, but was repaying its debt.
Northern Rock was nationalised after the Government failed to find a buyer for the business that provided "sufficient value for money to the taxpayer".
The lender's recovery strategy involved halving the balance sheet to £50 billion by the end of 2011 by stopping all business lending and accelerating mortgage redemptions for existing customers.
Northern Rock said it had 662,000 mortgage accounts at June 30, compared with 777,000 at the end of 2007. Its mortgage book fell to £77.4 billion from £90.8 billion during the six-month period, reflecting the scaling down of the balance sheet.
Northern Rock said last week that it was to make around 1,300 redundancies as part of its efforts to shrink the business. The job cuts relate to previously announced plans by the Newcastle-based business to cut 2,000 staff by 2011.
Shadow Treasury secretary Philip Hammond said the Treasury's £3 billion debt-for-equity swap to shore up Northern Rock's balance sheet was the "predictable consequence of nationalising a mortgage bank at the height of the housing boom".
Mr Hammond added: "Gordon Brown's regulatory regime failed to prevent the run on Northern Rock, and his subsequent dithering prevented a successful rescue.
"Now the taxpayer is being forced to hand over yet more money in order to keep this bank afloat."
"Once again, we are seeing how this Government just can't be straight with people."
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