Virgin Trains will be asked to continue to run services on the West Coast Mainline for at least another nine months after the latest decision on the route franchise was scrapped.
In a stock exchange announcement ministers said they will hold talks with Virgin for a "temporary" contract.
A competition will then be run for a new franchise agreement.
The decision to give FirstGroup the route from December was withdrawn over "technical flaws" in the bid process.
The Department for Transport told the London Stock Exchange it hoped Virgin would remain as the West Coast Mainline operator for between nine and 13 months while a competition was run for an interim franchise agreement.
This interim agreement will then run until a new long-term franchise agreement is in place.
"The government believes that this is the best way to ensure services are maintained and that there is no impact on passengers," it added.
A Virgin Trains spokesman said the move meant it was in a position to "offer customers some short-term continuity".
End Quote Patrick McLoughlin Transport SecretaryMy priority now is to fix the problem and the first step is to take urgent action to ensure that... services continue to run to the same standard"
The competition to run the line was cancelled on 3 October and led to the suspension of other franchise programmes including bids for Essex Thameside, Great Western and Thameslink.
The government has announced two independent reviews to focus on the West Coast competition and the wider DfT rail franchise programme.
Three civil servants were suspended over the way the West Coast franchise process had been conducted and the government has said the estimated cost of reimbursing Virgin, FirstGroup and two other companies for the cost of their bids will be about £40m.
The flaws in the bidding were discovered as the DfT was preparing to contest a legal challenge by Virgin to the decision not to award it the contract.
Transport Secretary Patrick McLoughlin said: "My priority now is to fix the problem and the first step is to take urgent action to ensure that... services continue to run to the same standard and passengers are not affected.
"I believe Virgin remaining as operator for a short period of time is the best way to do this and my officials and I will be working flat out to make this happen."
'Messy solution'Mr McLoughlin is due to give further details on the plans in the House of Commons at 15:30 BST on Monday.
The West Coast route serves 31 million passengers travelling between London, the West Midlands, the north-west of England, North Wales and the central belt of Scotland.
FirstGroup had initially beaten current operator Virgin Trains to win the 13-year franchise.
BBC News transport correspondent Richard Westcott said the interim contract will last for two years while the longer franchise will be handed out around the time of the next general election.
The decision was a "messy solution to a mistake that is costing the taxpayer tens of millions of pounds" but the transport secretary feels it is the best way to keep services running without disruption, our correspondent added.
Ahead of the announcement, Labour warned that a decision to extend Virgin's contract could see taxpayers exposed to further legal costs.
Shadow transport secretary Maria Eagle also said it was wrong for the investigation into the bid process to be carried by a DfT non-executive director.
RMT transport union leader Bob Crow described the decision to extend Virgin's franchise as a "shabby deal" but said it was "no surprise". The RMT had been hoping the West Coast franchise would be run by the DfT in the public sector.
Meanwhile, Manuel Cortes, leader of the TSSA rail union, said: "This decision means that the long-running Whitehall farce, known as private rail franchising, continues at the taxpayer's expense."
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