The government has asked Virgin to continue operating the West Coast rail line on an interim basis.
A 13-year franchise deal, due to commence in December, had originally been granted to FirstGroup ahead of the incumbent Virgin Trains, but the government was forced to pull the award earlier this month when it discovered serious flaws in the way it had run the process.
The Department for Transport (DfT) is now asking Virgin to continue operating the service, which runs from London to Scotland, for a further nine to 13 months from December, while it runs a competition for an interim agreement, it said on Monday.
"The cancellation of the InterCity West Coast franchise is deeply regrettable and I apologise to the bidders involved and the taxpayer who have a right to expect better," said Transport Secretary Patrick McLoughlin.
"My priority now is to fix the problem and the first step is to take urgent action to ensure that on the 9 December services continue to run to the same standard and passengers are not affected."
Three DfT civil servants were suspended after the West Coast bidding competition was halted earlier this month when "significant technical flaws" were found in the way the franchise process had been conducted.
FirstGroup, which had made a £5.5 billion bid to run the franchise, has seen its shares slide over 20 per cent since the deal was scrapped.
Virgin Trains - a venture between billionaire businessman Richard Branson's Virgin Group and Stagecoach - had offered £4.8 billion to continue with the franchise, and had mounted a legal challenge when it lost, with Sir Richard Branson describing the bidding process as "insane".
In the process of preparing for the legal challenge, the government uncovered mistakes related to the way it had calculated risk, leading to an embarrassing u-turn on the award of the franchise, the suspension of three employees, and the freezing of other ongoing franchise competitions.
Following the debacle, the government has ordered two independent reviews.
One will look into what happened with the west coast competition and is expected to report by the end of this month, while the other will look at the wider issue of rail franchising and report in December.
Virgin welcomed the government move this week.
"Customers have made it clear that they want Virgin to continue," a spokesman said.
"We are delighted to have the chance to continue delivering our excellent service."
The affair is humiliating for the ruling Conservative Party, which began its programme of rail privatisations in the 1990s, a project that has been dogged by fatal accidents, financial crises and political infighting.
In 2009, the government was forced to re-nationalise the east coast line after contracts with GNER and National Express collapsed.
"RMT will continue to fight for public ownership of the railways, a position supported by the vast majority of the British people," transport union the RMT said.
"This short term political fix will not detract from the call for rail to be run as a public service free from the chaos and greed of privatisation."
FirstGroup said: "We believe the private sector provides the most effective and efficient way to deliver passenger rail services in the UK.
"We await the outcome of the independent investigations into the West Coast franchise competition and the wider rail franchising process, which we hope will provide a greater degree of certainty and confidence not only to future bidders but to employees, stakeholders and the travelling public too."