Three Department for Transport civil servants have been suspended following mistakes made in the now-scrapped West Coast Main Line franchise.
The announcement came after Transport Secretary Patrick McLoughlin laid the blame for the fiasco "wholly and squarely" on the DfT.
The errors came to light after Sir Richard Branson launched a legal challenge when Virgin Trains lost out to FirstGroup in the recent competition to operate the route.
"Three officials involved in the West Coast franchise competition were today suspended by the Permanent Secretary while the full facts are established.
"No further details will be issued at this time about the suspensions."
The Transport Secretary has said that cancelling the competition to run the West Coast Main Line will cost the taxpayer £40 million.
Patrick McLoughlin said the U-turn on the West Coast Mail Line rail franchise award was "wholly and squarely" down to a Whitehall fault.
"The whole sorry and expensive shambles of rail privatisation has been dragged into the spotlight this morning and, instead of re-running this expensive circus, the West Coast route should be renationalised on a permanent basis."
"I took a call this evening in New York from the UK Secretary of State for Transport, telling me that he will no longer be awarding the West Coast Main Line franchise to FirstGroup.
"From the moment we found out that FirstGroup had been made the preferred bidder with a completely unrealistic bid, we questioned the way the offers had been assessed.
"I am pleased to say that the DfT has looked at all of the facts and found significant flaws in the way it's officials handled the process.
"They have basically acknowledged that what we had been saying is correct."
Russell Brown MP, has described the admission of flaws in the West Coast Mainline bidding process as "an utter shambles".Read the full story ›
"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 Coast mainline."
"We were notified late last night that the Department for Transport has apparently discovered significant technical flaws in the way its franchise process for the InterCity West Coast was conducted and has consequently cancelled the competition for this franchise.
"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."
Scottish Transport Minister Keith Brown said it was "not acceptable" for the UK Government not to tell ministers north of the border it was rerunning the competition to operate the West Coast Main Line.
He added that the U-turn by the Department for Transport "leaves so much up in the air".
"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.
Passengers can rest assured that while we seek urgently to resolve the future arrangements the trains that run now will continue to run, with the same drivers, the same staff and timetables as planned."
Cumbrian MP, Tim Farron, has spoken out over the decision to rerun the competition to operate the West Coast Main Line.
The Westmorland and Lonsdale MP said "people must be held accountable" for the errors.
FirstGroup was due to take over the franchise from Virgin in December.