The future running of one of Britain's most prestigious and lucrative rail services, the West Coast main line, was thrown wide open after the transport secretary, Patrick McLoughlin, announced that the competition had been cancelled following the discovery of significant technical flaws in the franchise process.
The news could potentially put other franchises due to be settled in the next two years on hold and will raise questions over the whole system, with unions and Labour considering calling for renationalisation.
The shock move means that the Department for Transport will no longer be awarding a franchise contract when Virgin's current one expires on 9 December, and will not contest the judicial review that Sir Richard Branson's firm sought in the high court.
In a climbdown that appears to vindicate Virgin's angry reaction to losing the franchise on 15 August, the DfT has indicated key staff will be suspended, apparently for incorrectly calculating the risk involved in the winning bid.
A spokesman for FirstGroup, which had been awarded the franchise, said: "We are extremely disappointed to learn this news and await the outcome of the DfT's inquiries. The DfT have made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT's terms."Our bid would have delivered a better deal for West Coast passengers, the taxpayer and an appropriate return for shareholders."