Virgin Trains has agreed to continue running the West Coast Main Line for up to 13 months while the Government resolves the flawed process that saw FirstGroup initially awarded the franchise.
The temporary agreement was proposed by the Department for Transport (DfT) after its embarrassing U-turn earlier this month when it admitted it got its sums wrong in its decision to give the business to FirstGroup.
Virgin's current franchise is due to end on December 9 but it has agreed to remain as operator while a competition is run for an interim franchise agreement.
Sir Richard Branson had led a campaign against the initial award to FirstGroup, claiming the 13-year deal would likely bankrupt the company, resulting in a legal challenge .
After discovering the errors and withdrawing the contract on October 3, the DfT later apologised to then-Transport Secretary Justine Greening who had sought repeated assurances from officials that the bid calculations were correct.
Three civil servants were suspended when the " significant technical flaws " came to light and a review process was launched.
Patrick McLoughlin, who replaced Ms Greening in a Cabinet re-shuffle, said today: "The cancellation of the InterCity West Coast franchise is deeply regrettable and I apologise to the bidders involved and taxpayers who have a right to expect better.
"My priority now is to fix the problem and the first step is to take urgent action to ensure that on December 9 services continue to run to the same standard and passengers are not affected.
The RMT transport union had wanted the West Coast franchise to be run by the DfT in the public sector, as is the case at the moment with the East Coast franchise.
RMT leader Bob Crow said: "This announcement is no surprise. The Government are ideologically opposed to public ownership of the railways and, in collusion with the private train operators, have stitched up a shabby deal that will enable them to rerun the whole franchise fiasco in a year's time.
"Richard Branson and his shareholders are laughing all the way to the bank."
A Virgin Trains spokesman said: "Our customers have made clear they want us to continue our excellent service and we now have the chance to deliver that and offer customers some short-term continuity.
"We will now be working hard to make sure we continue to provide the service that has made us successful. We are grateful for the fantastic support from customers and staff over recent months."