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 said services on the line between London and Edinburgh will be overseen by the Department for Transport (DfT) from June 24, until a previously-announced public-private partnership running both trains and track operations is introduced in 2020.
He told the Commons that the parent companies of VTEC - Stagecoach and Virgin - had "got their bid wrong" in terms of the revenue from the franchise, which was originally due to run until 2023.
Critics claim the decision to end the £3.3 billion contract early is a "bailout".
Yet Mr Grayling insisted that "taxpayers have not lost out" and it is only the private firms that have "made losses at this time".
He had considered permitting Stagecoach to continue running trains on a not-for-profit basis until 2020 and permit them to earn a performance-related payment at the end of a new deal.
But he opted for an Operator of Last Resort (OLR) controlled by the DfT, to "begin the transition" to the public-private body named East Coast Partnership.
The OLR function is provided by a group of private companies consisting of Arup, SNC-Lavalin Transport Advisory (InterFleet) and EY.
They will operate under the name of "one of Britain's iconic rail brands", the London North Eastern Railway (LNER), Mr Grayling said.
Stagecoach chief executive Martin Griffiths said the firm was "surprised and disappointed" by the decision as it believed its plans offered a "positive, value-for-money way forward for passengers, taxpayers and local communities".
He pledged to "work constructively with the DfT and the OLR" to ensure a "professional transfer" to the new arrangements.
Mr Grayling said there would be no impact on passengers or train staff as the switch would be "no different from a normal franchise change".
He added that he has received "official advice" that restrictions should not be placed on Virgin and Stagecoach's "passport" which entitles them to bid for future rail franchises, as "there is no suggestion of either malpractice or malicious intent".
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.
Shadow transport secretary Andy McDonald said Mr Grayling had "gifted" Stagecoach and Virgin a "£2 billion bailout" after they failed on the main line, adding: "And he has the audacity to come to that despatch box and say it's not reasonable to remove or place conditions on their passport. Absolutely ludicrous."
The service's most successful period had come under public ownership, Mr McDonald said, until it was "cynically reprivatised".
Mick Whelan, general secretary of Aslef, the train drivers' union, said: "Tory dogma - wedded to the failed model of privatisation - means they will return this line to the private sector, doubtless to fail again, in the not too distant future."