The British government has agreed to sell Northern Rock, the failed mortgage lender it nationalized in 2008, to Virgin Money, the banking arm of Richard Branson's Virgin empire.

Northern Rock, the first banking asset bought by the government during the financial crisis to be offloaded, will fetch between 747 million and 1 billion pounds ($1.2 billion - $1.6 billion) in cash, the finance ministry said on Thursday.

Even at the upper end that would mean a 400 million pound loss on the 1.4 billion pounds in equity pumped into the lender by taxpayers at the height of the credit crunch.

The sale of Northern Rock to Virgin Money is an important first step in getting the British taxpayer out of the business of owning banks, Chancellor of the Exchequer George Osborne said in a statement on Thursday.

The combination of Northern Rock and Virgin Money should also increase competition in British retail banking, challenging the dominance of HSBC, Barclays, Lloyds Banking Group, Santander and Royal Bank of Scotland, the UK Treasury said.

Under the deal, Virgin Money has pledged not to make any further compulsory redundancies from the combined bank, and to maintain Northern Rock's existing branch network.

Northern Rock, a former mutual that used cheap wholesale credit to grow aggressively in the British mortgage market, was nationalized in early 2008 after banks abruptly stopped lending to each other in the credit crisis, starving it of funding.

Virgin Money was one of several companies that expressed interest in buying Northern Rock during a failed attempt to sell the bank in late 2007.

The British government still holds an 83 percent stake in RBS and 41 percent of Lloyds, a legacy of its efforts to prop up the banking sector during the financial meltdown. ($1 = 0.633 British Pounds)

(Editing by Paul Hoskins)

Richard Branson