The East Coast rail service is to come under temporary state ownership, the government has decided.

Transport Secretary Chris Grayling told Parliament that the decision over the Edinburgh to London service would provide the smoothest transition to a new operator.

It comes after operators Virgin and Sir Brian Souter's Stagecoach could no longer meet the promised payments in the £3.3bn contract.

The service, which links to Glasgow, Aberdeen and Inverness will be taken back into public control on June 24, a little over three years since Virgin Trains East Coast started running.

HeraldScotland: SERVICES: More Saturday services are being added by train firm Virgin on the East Coast railway. Picture: SARAH CALDECOTT

The loss-making service is to be repalced by a public sector "operator of last resort" (OLR) and is being renamed London and North Eastern Railway (LNER).

It is the third time in a just over a decade that the government has called a halt to the East Coast franchise.

The transport secretary, Chris Grayling, told the House of Commons that after a “finely balanced” assessment by civil servants, he had decided to appoint the “operator of last resort” – a group led by the firm Arup and under government control – to run the service, rather than allow Stagecoach and Virgin to continue under fresh terms.

"I plan to use a period of operator of last resort control to shape the new partnership," said Mr Grayling.

HeraldScotland: Daniel Hannan and Chris Grayling

He said the aim was to create a new public-private partnership from 2020, with "one simple team operating the railway".

"They will then begin the task of working with Network Rail to bring together the teams operating the track and trains on the LNER network."

Mr Grayling told parliament that Stagecoach and Virgin have lost almost £200m, but that this had not been a loss to taxpayers "at this time".

He said he has received "official advice" that Virgin and Stagecoach should be allowed to continue bidding for future rail franchises.

The London to Edinburgh line has been run by a joint venture between Stagecoach and Virgin, for the last three years.

Mr Grayling said: “The route continues to generate substantial returns for the government. It is not a failing railway ... However, Virgin and Stagecoach got their bids wrong.”

He insisted taxpayers had not lost out, adding: “Only VTEC and its parent companies have made losses at this time ... We cannot expect companies to take on unlimited liabilities otherwise they would not bid for franchises.”

Scottish transport minister Humza Yousaf said he was disappointed that Mr Grayling had not spoken to him about the move in advance of the announcement.

HeraldScotland: Humza Yousaf

He said: "The East Coast Mainline is so important to Scottish businesses and commuters alike. Now a new board is being created to oversee OLR, we must be involved. Not only should there be no dimunition of services to Scotland, the promised enhancements to the service must be not be scrapped."

He said it was "important" that unions' concerns are listened to and employees jobs, terms and conditions were protected during any transitional arrangements.

"While supportive of the UK government running East Coast Mainline as Operator of Last, they have failed this franchise 3 times in last decade," he said. "I'll be speaking to the UK government later today and demanding the Scottish Government is involved in the new board... we cannot be ignored."