In exchange, British Energy (BE) must pay 20 million pounds a year plus 65 percent of available cash towards those liabilities, estimated by BE at 5.2 billion pounds ($8.1 billion). A new state-backed body called the Nuclear Liability Fund will manage the clean-up.

"The government's overriding priorities have always been to ensure nuclear safety and security of electricity supplies," said a government statement. "This restructuring package is a pragmatic approach that should ensure that these aims are met."

This new burden on the state purse comes just a day after slowing economic growth forced it to double borrowing plans for this year to 20 billion pounds.

A 650 million pound ($1.0 billion) state loan will be extended to March 9 while the proposals are put to creditors. If the plan comes unstuck, BE could face insolvency proceedings.

BE ran into trouble this summer after wholesale power prices tumbled below its production costs. It has been surviving on government money since September.

LAME DUCK

The news that another lame-duck privatised company has its hand back in the taxpayer's pocket comes just six months after the public backed a multi-billion-pound investment in a new firm to replace failed railway network operator Railtrack.

Anti-nuclear group Greenpeace was furious.

"Today's decision, coming at a time when the electricity market is overproducing, is bound to negatively affect the development of clean, green energy sources like offshore wind that could meet our needs 10 times over and create many thousands of jobs," said campaigner Emma Gibson.

Opposition politicians blamed the debacle on the government, whose move to open the power market to competition drove down prices, and which blocked a new fuel contract between BE and state nuclear fuel reprocessor BNFL earlier this year.

"The truth is that the government's own actions and omissions created problems for British Energy, which would have not otherwise arisen," said Tim Yeo, Conservative Party spokesman on trade and industry.

The proposed restructuring involves the issue of an unspecified number of new shares plus 700 million pounds ($1.1 billion) worth of new bonds in exchange for existing bonds.

BE said the move would "very significantly" dilute the holdings of existing shareholders. A source close to the company said shareholders could expect to hold less than 10 percent of the expanded equity. Bondholders would take on the rest in a debt for equity swap, or risk losing everything to insolvency.

"Something is better than nothing," said Malcolm Stacey, who runs sharecrazy.com, representing some of BE's 224,000 small investors. "Shareholders have lost a lot anyway."

BE's battered shares plunged 60 percent to a new low of 7.5 pence, valuing the former blue chip firm at just 46 million pounds. The debt-for-equity swap leaves shareholders bearing the brunt of the pain of restructuring.

HAIRCUT

Bond analysts now expect bond investors will have to write off two thirds of their money in the restructuring.

"It's not the best deal... Bondholders will have to take a substantial haircut on this one," said Gracie Ebadan-Bola of credit rating agency Fitch.

"It really doesn't sound too good," said one bondholder. "But when the alternative is administration I don't suppose we have much choice than to say yes to this."

BE bonds have been trading at about half of their face value.

BE Executive Chairman Robin Jeffrey quit. Former Treasury adviser Adrian Montague will replace him. Montague is also deputy chairman of Network Rail, the company that took over the country's railways from Railtrack.