The £747m sale of Northern Rock to Virgin Money is to be investigated by the National Audit Office (NAO).
NAO head Amyas Morse confirmed the audit in a letter to shadow financial secretary Chris Leslie, but added that he had no power to intervene.
The sale of the state-owned bank is likely to mean a loss of between £400m and £650m and Labour is urging the government to delay the sale.
However, ministers insist they got taxpayers the "best possible deal".
Mr Leslie had asked the public spending watchdog to delay the sale so it could pre-assess the deal.
However, in a letter to the Labour MP, Mr Morse said the NAO could only investigate a completed sale and could not stop the deal going through.
"I can confirm that I have decided to conduct a value-for-money study in relation to the creation and sale of Northern Rock plc," said Mr Morse.
'Matter of urgency'
"However, my role in conducting value for money studies is to act as an auditor, in this case of the completed sale transaction."
He added that the probe would be carried out "as a matter of urgency".
It is thought the investigation will report back before the Commons summer recess next year.
Virgin Money struck a deal to buy Northern Rock for £747m in November, with the government saying it had got the "best possible deal" for taxpayers.
It argued it was the right time to sell because Northern Rock was predicted to remain loss-making well into 2012.
But Labour criticised the move, saying the government should have sought an extension on an EU deadline which requires the bank to be sold by the end of 2013.
Chancellor George Osborne has said the deadline was negotiated by his Labour predecessor, Alistair Darling.
Taxpayers originally injected £1.4bn into Northern Rock in 2010, meaning at face value the sale represents a loss of £650m.
Mr Leslie said on Saturday: "There is clearly strong evidence to suggest that this Northern Rock firesale represents poor value for money for the taxpayer.
"This investigation by the independent National Audit Office confirms that serious questions hang over George Osborne's deal.
"At present there is the possibility that those buying Northern Rock could asset-strip so much from the firm that they get back virtually every penny they invest within a matter of months.
"Ministers haven't thought through this deal carefully enough - they have a duty to do better than this."
Northern Rock was nationalised during the start of the global credit crunch in 2008.
In 2010, the Labour government split the bank into two - Northern Rock plc, and Northern Rock (Asset Management).
The bank's bad debt was placed in the latter, which remains saddled with the cost of being bailed out. It owes the Treasury £21bn.
The government has said it has no plans to sell Northern Rock (Asset Management).