Transport Secretary Chris Grayling told the House of Commons this afternoon that no decision had yet been taken on the future of the Great Northern franchise, but that Great Northern services coming out of London King's Cross might be merged into LNER.
The London to Edinburgh line has been run by a joint venture between Stagecoach and Virgin, for the last three years.
Stagecoach said it and Virgin had been negotiating for a new contract with the Department for Transport but that it understood Mr Grayling was "no longer considering" them for the deal.
Vtec, which is the third private operator to hit financial difficulties running Scotland-London trains for bidding too much, was denied a new contract.
He said the aim was to create a new public-private partnership from 2020, with "one simple team operating the railway".
Former transport minister Lord Adonis labelled the government's decision a "bailout" for the companies that would cost the taxpayer billions of pounds.
Stagecoach and Virgin were supposed to run services on the line until 2013, but the government had previously agreed to let them walk away from the agreement three years early.
It reported losses on the line and in November a year ago Mr Grayling announced that the franchise would be terminated in 2020 to enable it to become a public-private railway.
"We are surprised and disappointed that the Department for Transport has chosen not to proceed with our proposals".
At the time, Virgin Group owner Sir Richard Branson said the partnership's bid for the franchise was "based on a number of key assumptions and a promise of a huge upgrade of the infrastructure by Network Rail", which faced delays.
"However, we respect the Government's decision".
The company pledged to "work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements".
Mick Whelan, general secretary of ASLEF, the main train drivers' union, said it hoped Mr Grayling would now bring the rest of our railways into public ownership too.
In February Grayling admitted the beleaguered East Coast mainline rail franchise had collapsed.
"Britain's railways should be run, successfully, as a public service, not for private profit".