Bank rescued by taxpayers set to be sold again.
The Chancellor made the announcement in a speech at London's Mansion House in which he also said he would force banks to ring-fence retail from investment banking.
Mr Osborne said banks must be set up so their High Street branches and savings and loans would not be damaged if their trading units ran into trouble.
The separation of the functions of major banks was recommended by the Independent Commission on Banking.
The auction of Northern Rock is expected to raise about pounds 1bn, which is less than the pounds 1.4bn the government injected into the bank.