Trade secretary Patricia Hewitt has welcomed news that British Energy has reached an agreement on its debts that will avoid pushing the company into administration.

It was announced on Wednesday morning that the troubled nuclear energy generator had agreed a restructuring plan with creditors who had been owed some £1.3 billion.

In a debt-for-equity swap, banks will hold 97.5 per cent of the company's stocks, while current shareholders will be left with the rest.

As a result of the settlement, the government will continue to make a £200 million credit facility available to British Energy.

"This is a significant step forward by British Energy towards the implementation of its restructuring plan and represents real progress by the company in meeting the conditions set out on 28 November last year," said Hewitt.

"However there remain significant milestones ahead. The government will remain well prepared for administration in case those conditions cannot be met."

The deal now has to be approved by the European Commission, which has already opened a formal investigation into whether the UK government's support for British Energy broke EU rules on state aid.

The Department for Trade and Industry said it was continuing to work with the Commission to complete the investigation "as swiftly as possible".

And in a bid to concentrate minds, the DTI said that if it is "not satisfied that British Energy will be viable in all reasonably foreseeable conditions, or if there is a material adverse change in British Energy's position, the government has reserved the right to withdraw its support for the restructuring".

Should the restructuring deal fall through, the government stressed that it has contingency plans for the administration of the company.

"This means that whether or not the solvent restructuring plan is implemented the nuclear power stations will continue to generate electricity and employ staff and customers' lights will stay on," said a DTI statement.

"Government's overriding objectives of ensuring the safety of the nuclear power stations and the security of electricity supplies to the grid and consumers will be met."

News of the deal brought a mixed reaction from the opposition parties.

Shadow trade secretary Tim Yeo warned that while the nuclear industry's long-term future was in limbo, the company would continue to face difficulties.

"The company will still suffer the effects of government dithering over the future of the nuclear power industry," he said.

"Until ministers decide whether there is a role for nuclear power in Britain's long term electricity generation needs, expertise will drift away and British Energy will operate in a climate of uncertainty."

The Liberal Democrats accused the government of double standards having attacked fellow EU countries for similar moves.

The party's trade spokesman Vince Cable described the bailout as another difficult milestone for the firm.

"The British government demand that other EU countries, such as France, stop unfair government aid for failing enterprises, and it is double standards to demand the right for the UK," he said.

"Energy producers of renewables, gas and coal have been forced to face the rigours of the energy market. There is no reason to exempt the privatised nuclear power industry. British Energy ought to be placed into administration. Why should the taxpayer carry the risk?"