The competition to operate the West Coast Main Line has been cancelled after flaws were discovered in the bidding process. The announcement was made by the Department for Transport early on Wednesday morning.
FirstGroup was due to take over the franchise from Sir Richard Branson's Virgin in December, but the decision means the contract will no longer be awarded.
Virgin said it would assist the DfT by continuing to run the service while the independent reviews were conducted.
The Glasgow to Euston line runs through Dumfries and Galloway and Cumbria.
Sir Richard had mounted a legal challenge to the decision by the Department for Transport (DfT) to award a new 13-year franchise for the West Coast not to Virgin Rail but to rival transport company FirstGroup.
The DfT had intended to contest the matter in court and was still hoping FirstGroup would take over the London to Scotland route as planned on December 9.
But early today, in an embarrassing U-turn for the Government, Transport Secretary Patrick McLoughlin said he was cancelling the competition for the running of the West Coast franchise "because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process".
Mr McLoughlin said the DfT would no longer contest the judicial review and had paused all outstanding franchise competitions pending two independent reviews he has set up.
Sir Richard, who had described the bidding process as "flawed" and "insane", welcomed the decision and said he he was hopeful Virgin would carry on running the franchise which it has been operating since 1997.
FirstGroup said it was "extremely disappointed" at the news, saying it had submitted "a strong bid, in good faith and in strict accordance with the DfT's terms".
Shadow transport secretary Maria Eagle MP said the West Coast franchise process had been a "fiasco" which had "yet again exposed the shambolic incompetence of this Tory-led Government".
Liberal Democrat party president Tim Farron, who is MP for Westmorland and Lonsdale in Cumbria, said "people must be held accountable" for the errors.
House of Commons Transport Committee chairman Louise Ellman MP said she was "astonished" by the development and said it put the whole franchising process "in disarray".
An announcement is expected to be made later today about the suspension of Government staff while the department investigations are conducted.
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