Rail services on the East Coast Main Line will be brought back under public control following the termination of the franchise agreement with Virgin Trains East Coast (VTEC).
Transport Secretary Chris Grayling told the Commons: "I will terminate Virgin Trains East Coast's contract on June 24 2018.
"I plan to use a period of Operator of Last Resort control to shape the new partnership.
"So on the same day we will start with the launch of a new long-term brand for the East Coast Main Line through the recreation of one of Britain's iconic rail brands, the London and North Eastern Railway, the LNER.
"The team that's been working for me since last autumn to form the Operator of Last Resort will take immediate control of passenger services.
"They will then begin the task of working with Network Rail to bring together the teams operating the track and trains on the LNER network."
Stagecoach, which owns 90 per cent of VTEC, said it was "surprised and disappointed" that the Government chose not to award it a new deal to continue running services on the London to Edinburgh route.
The company pledged to "work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements".
It reported losses on the line and in November last year Mr Grayling announced that the franchise would be terminated in 2020 to enable it to become a public-private railway.
The decision to end the £3.3bn contract this year has been described as a "bailout" by Labour and trade unions.
VTEC is the third private operator to fail to complete the full length of a contract to run services on the East Coast route.
GNER was stripped of the route in 2007 after its parent company suffered financial difficulties, while National Express withdrew in 2009.
Services were run by the DfT for six years up to VTEC taking over in 2015.
In a stock market statement, Stagecoach chief executive Martin Griffiths, said: "We are surprised and disappointed that the Department for Transport has chosen not to proceed with our proposals. We believe our plans offered a positive, value-for-money way forward for passengers, taxpayers and local communities, ensuring the continuation of the exciting transformation already under way on East Coast and a smooth transition to the Government's new East Coast Partnership.
"However, we respect the Government's decision. We will work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements, supporting our employees and maintaining the same clear focus on our customers as we have over the past three years.
"Today's decision should not detract from the hard work and dedication of our people at Virgin Trains East Coast, who have been central to the transformation we have been delivering for our customers over the past three years. During that time, we have attracted more passengers, greatly increased investment, achieved industry leading customer satisfaction and made significant payments to the taxpayer to reinvest in public services.
"Despite today's news, we believe that we can continue to make a positive contribution to the UK rail market, delivering long-term customer benefits and sustainable returns for taxpayers and investors," he added.