Two suitors competing to rescue British bank Northern Rock have been told to improve their offers to beat the alternative of nationalization, sources familiar with the matter said.

The Virgin consortium, though, has been picked as a front-runner, ahead of a rival in-house proposal led by the mortgage bank's current management team, the sources said.

Virgin are ahead at the moment but they would need to improve their offer before the government is ready to do a deal, one source close to the talks said.

A spokesman for entrepreneur Richard Branson's Virgin said the group would continue to talk to the government about its proposal, but declined to comment further.

The government, for whom Northern Rock has become a political headache, has lent 25 billion pounds ($49 billion) to the bank since its near-collapse in September, and has consistently said it would prefer a private solution.

But the sources said all-out nationalization was still currently seen as a better outcome for the taxpayer.

Both the Virgin and the in-house options would essentially be public-private partnerships. The sources said the option led by the bank's management had not been ruled out.

News that Virgin is ahead, though, will be a blow to the bank's larger shareholders who have said that proposal would significantly dilute existing investors' stakes.

The bank's volatile stock was down 4.5 percent at 100.25p at 3:01 a.m. EST, valuing Britain's fifth-largest mortgage lender at just over 420 million pounds.

Virgin and the bank's management team submitted rescue plans for Northern Rock, Britain's biggest casualty of the global credit squeeze, last week. The government is expected to make a decision by the end of this month.

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