The East Coast mainline rail franchise has been awarded to a consortium involving Virgin Group and transport company Stagecoach.
There had been speculation that a consortium of Eurotunnel and French company Keolis had been chosen as the new operator, but they missed out along with the other shortlisted bidder, FirstGroup, which has recently also lost its First Capital Connect and ScotRail franchises.
Transport Secretary Patrick McLoughlin said the new franchise, which will net the government roughly £3.3bn over eight years, was "a fantastic deal for passengers and for staff on this vital route" and would give passengers "more seats, more services and new trains".
But there was consternation from transport unions as the line, which links London with East Anglia, Yorkshire, the North East and Scotland, has been run under the control of the Department for Transport since November 2009 after National Express pulled out. They claim the company offers good value for money to taxpayers.
Mick Cash, general secretary of the RMT union, said the reprivatisation of the line was "a national disgrace and an act of utter betrayal".
He added: "It is simply ludicrous to even contemplate reprivatisation when not only have there been two previous private sector failures on the East Coast route but when the public sector rescue operation has been such a stunning success."
Virgin and Stagecoach already operate the West Coast main line and have promised improved services on East Coast, which will be run by a new company called Inter City Railways.
Under the terms of the eight-year franchise there will be 23 new services from London to key destinations, with 75 more station calls a day as well as plans for direct links to Huddersfield, Sunderland, Middlesbrough, Dewsbury and Thornaby.
Across the entire train fleet there will be 12,200 additional seats – a 50 per cent increase – and 3,100 extra seats for the morning peak time by 2020 and journey times from London to Leeds will be reduced by 14 minutes, and from London to Edinburgh by 13 minutes.
The consortium will invest £140m to improve trains and stations including a total of 65 state-of-the-art Intercity Express trains to be brought into service from 2018, totalling 500 new carriages.
McLoughlin said: "We are putting passengers at the heart of the service. I believe Stagecoach and Virgin will not only deliver for customers but also for the British taxpayer. This government knows the importance of our railways. That is why they are a vital part of our long-term economic plan, with over £38bn being spent on the network over the next five years."
Virgin boss Sir Richard Branson said: "Our long and fruitful partnership with Stagecoach has revolutionised the West Coast line and train travel in the UK, and we are looking forward to bringing the lessons we have learnt across to the East Coast and building on the success there. We are excited to work with East Coast's great group of talented people, who we know will bring to life that famous and much-loved Virgin spirit under the new franchise."
But Shadow transport secretary Michael Dugher said the travelling public had been "sold down the river" and added that he had written to the Department for Transport's permanent secretary asking him to postpone the East Coast franchise process.
He said: "This whole franchise process shouldn't have happened. East Coast has ... established itself as one of the best train operating companies in the country. Rather than rigging the franchise timetable in order to sell it off before the election, David Cameron's government should have been putting the public interest first and working to get a better deal for passengers."
He added: "It's absurd that our own public operator is the only rail company in the world that has been barred from challenging to run its own services, on the ideological grounds that it is British and publicly owned."
National Express's pull-out from the East Coast franchise had been preceded by the withdrawal of another private sector operator of the line, GNER.
Mick Whelan, general secretary of the train drivers' union Aslef, said: "Today's announcement is a hugely disappointing and short-sighted decision, which puts dogma ahead of all right thinking and common sense. The East Coast has delivered excellent value and service for both passengers and taxpayers in the public sector over the last five years. All of this is now lost."
Len McCluskey, the Unite general secretary, said: "This nakedly political decision to rush through this reprivatisation before the general election is a betrayal of the taxpayers and staff who have made East Coast a success.
"Rail privatisation has spectacularly failed both taxpayers and the travelling public. Rather than one that has glued itself to a failed dogma, we need a government that puts the people and our national bank balance first."