TROUBLED Arriva Trains Northern has been dealt another blow in its bid to cling on to the second biggest rail franchise in the region.

The company was warned yesterday that it could be stripped of its Trans-Pennine franchise by rail chiefs, who fined it £2m for cancelled services.

Arriva is vying with rivals Connex and First Group to win the new contract for the route, which links the North-East with Manchester and Liverpool.

But it looks to have moved to the back of the queue, after the Strategic Rail Authority warned that its appalling record would be a strong factor in the final decision.

The comments have strengthened the hand of First Group and its partner, Keolis, which is working on a new set of proposals for the authority.

Fellow bidder Connex has been the subject of fierce criticism over its running of the South Central Line, in London.

Gavin Bostock, of the rail authority, said: "We are still some way from being at a stage where we are in final negotiations with the parties.

"We will be looking at what steps Arriva takes to recover its situation, but if this continues, then that will, in all likelihood, count against them."

Meanwhile, Arriva has described as "mischievous nonsense" speculation that it may pull out of rail services altogether.

Industry sources have suggested that the Sunderland transport group may seek to concentrate on its other interests, which include bus services and a motor retailing division.

Julian Evans, of Arriva, said it remained committed to rail, and did not have a conflict of interests.

He said that as well as being short-listed for the Trans-Pennine route, it was also looking to bid for other northern franchises.

Arriva has agreed a short-term timetable with the rail authority to give it breathing space to try to solve its shortage of train drivers, which has resulted in thousands of trains being axed, and replaced by buses.

It must meet stringent targets set by the authority on driver recruitment, or face further fines