The franchise for Virgin East Coast Trains is to end three years early, in 2020.
The Transport Secretary Chris Grayling announced that a new East Coast Partnership will take on responsibility for intercity trains and track operations on the route.
Virgin Trains East Coast, a partnership between Stagecoach and Sir Richard Branson's Virgin, had agreed to pay the Government £3.3 billion to run the service until 2023.
But there was concern that the firms were considering pulling out of the deal for financial reasons, which is what National Express did in 2009.
The route was run by the Department for Transport for six years up to 2015.
Stagecoach was forced to take on a one-off charge of £84 million due to "anticipated losses" over the next two years under the "onerous contract".
The company's shares soared on the news that the franchise was coming to an end earlier than expected, rising 13% to 180.8p in afternoon trading.
Labour peer Lord Adonis, who was transport secretary between 2009 and 2010, vented his frustration in a series of social media messages.
He wrote: "DfT has serious questions to answer about the fiasco on East Coast and why they are (in effect) bailing out Stagecoach/Virgin with taxpayer money.
"National Express asked me for a bail out on East Coast in 2009. "I refused & nationalised the franchise rather than do so."
Lord Adonis added: "Hundreds of millions which should have been invested in the railways now being gifted to Stagecoach/Virgin!"
The early termination of the franchise was announced as part of sweeping reforms to Britain's rail network, which shadow transport secretary Andy McDonald described as a "total smokescreen".
Speaking in the Commons, he said: "The real issue is that the East Coast franchise has failed again and the taxpayer will bail it out ... The public want public ownership of the railways and the next Labour government will deliver it."
Mick Cash, leader of the Rail, Maritime and Transport union, claimed the decision is "another outrage on the scandal-ridden East Coast" where a successful public sector operation was "smashed up to allow the private rail companies another run at ripping off the British people".
Stagecoach chief executive Martin Griffiths said the firm was "encouraged by the positive new direction for Britain's railway" and welcomed the opportunity to negotiate new terms for the East Coast franchise.
Sir Richard said having a single rail infrastructure provider across Britain "doesn't work" and Mr Grayling's announcement was "a welcome move".
The Department for Transport released the following statement: