Northern Rock has announced bigger-than-expected losses of ?585.4m for the first six months of the year.
Much of the loss came from the charges it takes to cover losses from struggling mortgage borrowers.
But it also managed to repay ?9.4bn of a loan from the Bank of England, reducing the amount owed to ?17.5bn.
The government, which nationalised the lender in February after the first run on a UK bank in more than a century, will inject ?3bn to help its finances.
'Mega rights issue'
The money for the cash injection will come by pausing repayments of the giant taxpayer loan made to the bank, and about ? 3bn of that will be converted into equity.
"Or to put it another way, the nationalised bank is having a mega rights issue that taps its one shareholder," BBC business editor Robert Peston said.
"It is similar to what other banks have been doing recently, where they have been having rights issues.
"But the ?3bn is taxpayers' money - that is money that is very much at risk."
'State aid approval'
Chancellor Alistair Darling told Radio 4's Today programme that Northern Rock, like other banks, found itself in a "very difficult situation".
"Northern Rock needs more share capital," he said.
"It doesn't have shareholders now that... it's owned by the government, so it's got to come to us, so what we've said is that we will put in up to ?3bn.
"We've got to get state aid approval for that so we can't give a precise figure, but up to ?3bn may be necessary."
Arrears increasing
Newcastle-based Northern Rock revealed that the total percentage of its residential mortgage customers in arrears and being repossessed had risen sharply from last year.
In June 2007 the figure stood at 0.38% of mortgages, but it has now risen to 1.18%. That however, is lower than the Council of Mortgage Lenders average of 1.21%.
The company said this is due to more difficult economic and market conditions.
The number of house repossessions has also risen from 2,215 to 3,710 - an increase of 67%, which represents 0.56% of all mortgage accounts.
The company says this is because it is moving to repossess properties more quickly when it is clear that customers will not be able to maintain their mortgage payments.
Debt staff
In a further sign of customers finding it harder to make ends meet, it also said it was increasing staff numbers in debt management from 185 to around 500.
Northern Rock had advanced some loans worth as much as 125% of home values, to some customers.
However arrears among those "Together" mortgage holders have soared from 0.73% a year ago to 2.14% this June.
Many of those customers could be left in a position of negative equity - where the value of the mortgage exceeds the value of their house, and may also struggle to find other sources of finance when their current loans end.
Loans reduced
Northern Rock was hit hard by the global credit crunch, when its main method of financing mortgage loans - by borrowing cash from the wholesale markets - dried up.
The only people that are left holding mortgages at Northern Rock are really those that are unable to find alternative mortgage providers and they're very high risk people
Ralph Silva, Tower Group
The bank, once Britain's fifth-biggest home loan provider, was taken into public ownership after it failed to find a suitable buyer from the private sector.
In another sign of its scaling back, Northern Rock has reduced the number of its mortgage accounts by 15%, to 662,000 at the end of June compared to 777,000 at the end of 2007.
Loans and advances to customers have also been cut back - by ?14.5bn in the first half of the year to ?84.4bn.
But Northern Rock's executive chairman Ron Sandler 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."
'High risk people'
Ralph Silva, a banking analyst from the Tower Group, told the BBC those who still were had mortgages with Northern Rock were likely to be high risk customers.
Things could be a lot worse... 7,000 people could be out of work
Peter Montellier, The Journal
"Reasonable customers with reasonable credit ratings and a reasonable mortgage would have already left the bank," he said.
"The only people that are left holding mortgages at Northern Rock are really those that are unable to find alternative mortgage providers and they're very high risk people.
"That's why we have so many families in the north-east of the country with the potential of going into a negative equity situation."
It in results it said it was facing a cost of ?37m associated with redundancy, payments in lieu of notice, and outplacement services as part of the restructuring of the business.
Peter Montellier, deputy editor of the Newcastle-based newspaper The Journal - which ran a high-profile campaign to save the bank, said: "Things could be a lot worse... 7,000 people could be out of work.
"We believed a year ago [Northern Rock] was worth support and we still believe it is worth support."
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