THE fight for the East Coast Main Line began in earnest last night after the Government stepped in to end crisis-hit GNER's ten-year franchise.

GNER, whose parent company Sea Containers is in financial difficulties, has seen its contract terminated with immediate effect.

The company, which is based in York, will be permitted to continue running services for the next 12 to 18 months under an agreement with the Department for Transport (DfT), while a new franchise holder is found.

Within hours of the announcement being made, First Group and Richard Branson's Virgin Rail signalled their intention to bid for the flagship east coast route.

GNER could still bid for the franchise, but that is unlikely, with Sea Containers wrestling with debts of $660m (£330m) and filing for bankruptcy protection in the US.

As part of its franchise deal, GNER agreed to pay the Treasury £1.3bn over ten years, but has warned it cannot meet the huge financial burden that has been placed upon it.

Last night, Peter Wood, a North-East spokesman for campaign group Rail Future, said: "The Government will still probably expect to receive a payment from any new operator, but they themselves will certainly pay a lot less to run the service than GNER did.

"We would want someone who would provide the best service for the customer and someone, importantly, who can put the franchise on a sound financial footing."

The North East Chamber of Commerce (NECC) warned that a new franchise could result in a "marked drop" in the quality of the service.

Rachel Spence, NECC's transport spokeswoman, said: "GNER was backed by businesses in its initial bid because of the excellent standard of service for business passengers.

"If the new franchise comes down to a choice between what kind of subsidy is paid to Government and providing excellent service, we would strongly urge the latter."

FirstGroup, which runs four rail franchises, including Great Western, said in a statement: "We look forward to receiving further details from the DfT and submitting plans for the InterCity East Coast franchise, which will deliver high-quality services for passengers and value for money for the taxpayer."

A spokesman for Virgin said: "We will definitely bid. We feel we can develop the service further and attract more people to rail, much in the same way that we have done with our Cross Country franchise and on the West Coast Main Line."

It is thought the majority of GNER's 3,000 staff who work on trains and in stations would transfer to any new operator should the franchise change hands as expected.

Transport Secretary Douglas Alexander said: "The Government made it clear that rail operators that fall into financial difficulty should expect to surrender the franchise and not receive financial support.

"To do otherwise could set the precedent that we are willing to bail out operators at extra cost to the taxpayer."

GNER chairman Bob Mackenzie, who is also Sea Containers chief executive, said: "While we are not in breach of the current franchise agreement, GNER will not be able to meet the significant increase in franchise premium obligations due from May 2007.

The management agreement is a sensible solution for all parties.

"It also limits the financial exposure for Sea Containers, which is important in our restructuring process."

Bob Crow, general secretary of the RMT rail union, said: "GNER's operations should now be brought back in-house by the Government to harness the revenue for the benefit of the whole industry."