The Co-operative Bank looks set to fall into the hands of US hedge funds and other big institutions after they tore up the embattled lender's £1.5 billion rescue plan.
The Co-operative Group had hoped to retain control of its banking arm under a planned stock market flotation, giving owners of its bonds a minority stake in return for them pouring £500 million into its turnaround fund.
But under heavy pressure from the influential investors, the Co-op today admitted the bank's capital-boosting plan will be "materially different" to an earlier blueprint - with the customer-owned parent expected to lose control.
The growing likelihood of the self-styled ethical lender being controlled by predatory US hedge funds and blue-chip investors such as pension funds and insurers triggered warnings over the bank's future ethos.
However, the Co-op, which traces its roots back to the Rochdale Pioneers in 1844, insisted any solution aims to preserve the bank's "ethical focus". It is thought the mutual will remain the bank's biggest single shareholder.
Several thousand retail investors such as pensioners, who invested an average of £1,000 each in the high-yielding bonds for a steady income, are expected to be handed income-paying bonds, after campaigning against the initial plan which would have given them shares in the bank.
Meanwhile, the bank revealed it is setting aside up to £105 million more to cover mis-sold payment protection insurance (PPI) and other issues, after taking a fresh look at its provisions.
However, it said a demand by City watchdog the Prudential Regulation Authority (PRA) for it to raise another £1.5 billion of rescue capital "remains unchanged" - as it had already factored in "future conduct risk provisions".
Andre Spicer, professor of organisational behaviour at Cass Business School, said: "It is unlikely that the Co-op will maintain its ethical approach in the long run.
"History suggests that once a mutual bank is privatised it drops the focus on doing good to focus on doing well for shareholders."
Figures published in August showed the bank plunged to half-year loss of £709.4 million.
At the time the Co-op Group's boss Euan Sutherland insisted there is "no plan B" for rescuing its bank, as he reiterated a turnaround strategy requiring a £500 million contribution from bondholders, with £1 billion coming from the group.
But bondholders led by US hedge funds Aurelius Capital Management and Silver Point Capital - who own 43% of the higher-ranking bonds slated to be hit - have since ratcheted up the pressure on the bank, proposing an alternative plan of converting more debt into shares.
The new plan is expected to see hedge funds' and other big investors' bonds largely converted into shares, leaving the Co-op Group with a minority stake.
The bank said: "We currently expect that many elements of any recapitalisation plan will be materially different to the outline provided on June 17."
It added: "The plan continues to evolve through the process of consultation and negotiation with bondholders, therefore we cannot provide further detail at this stage.
"Constructive engagement with bondholders is continuing and the group remains confident that a proposal to recapitalise the bank can be agreed and put to bondholders. We will make a further announcement when appropriate."
The extra £105 million provision also includes compensation for mortgage customers affected by a newly-discovered flaw in which they were charged only interest on their first mortgage instalment - meaning further payments were higher than they should have been.
Customers who took out Platform and Optimum mortgage products would have been affected, although the bank has not yet notified any of them and further details of the scale of the issue remain unclear.
The bank said the new provision also took into account "the identification of a technical breach of the Consumer Credit Act".
This was thought to relate to failing to inform some loan customers that they could reduce their outstanding balance.
The extra provision also includes money put aside because of overdue payments and unpaid cheques.
The bank's woes have been blamed on soured corporate loans, many of which were acquired with its takeover of Britannia Building Society in 2009.
The Co-op Bank has around 4.7 million customers and employs about 10,000 staff. Its turnaround is expected to see heavy cost-cutting.
Mr Sutherland later confirmed the mutual has struck a deal which will leave it with just 30% of the bank, with investors taking the rest.
In a video message on the group's website, Mr Sutherland said the agreement in principle "saves the Co-operative Bank".
He said: "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this."
He added: "This is the first bank to be rescued and to survive as a standalone entity without taxpayer money."
Mr Sutherland, the former chief operating officer of B&Q owner Kingfisher, said the customer-owned group will announce more detail in coming days.
The Co-op Bank also said it has requested suspension of trading in its subordinated debt and preference shares while it finalises the plan.