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.
– Transport Secretary, Patrick McLoughlin MP
"I have had to cancel 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.
"A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held.
"I have ordered two independent reviews to look urgently and thoroughly into the matter so that we know what exactly happened and how we can make sure our rail franchise programme is fit for purpose."
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.
– Virgin statement
"We welcome today's frank announcement by the Secretary of State, acknowledging the flaws in the way the InterCity West Coast competition was assessed and launching a review into franchising more widely.
"We are ready to play a full part in assisting the review to help deliver a franchising system that better serves passengers, taxpayers and the interests of all bidders.
"In the meantime, we will assist the Department for Transport in ensuring continuity of service for the millions of customers who depend on train services on the West Coastmainline."
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".
– FirstGroup statement
"Until this point we had absolutely no indication that there were any issues with the franchise letting process and had received assurances from the DfT that its processes were robust and that it expected to sign the contract with FirstGroup soon.
"We are extremely disappointed to learn this news and await the outcome of the DfT's inquiries.
"The DfT has made it clear to us that we are in no way at fault, having followed the due process correctly.
"We submitted a strong bid, in good faith and in strict accordance with the DfT's terms.
"Our bid would have delivered a better deal for West Coast passengers, the taxpayer and an appropriate return for shareholders."
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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