THE Government delivered a devastating blow last night to billion-pound plans for a new era in North-East rail travel.

Transport Secretary Stephen Byers rejected a 20-year franchise plan for the East Coast Main Line in favour of a short-term deal with operator GNER.

The move puts on hold a billion-pound plan that would have transformed the line into one of the best in Europe.

GNER and Virgin had pledged to upgrade services on the line if they were awarded a 20-year franchise.

GNER planned to spend £1.3bn on a fleet of tilting trains that would cut the journey time between London and Edinburgh by half an hour. The first trains were due to come into service by 2004.

Virgin's plans were even more ambitious. Richard Branson's company wanted to build a high-speed track capable of running 200mph bullet trains.

The rivals agreed they needed a 20-year contract to justify the massive expenditure.

As recently as last week, both companies thought they were still in the running for a 20-year franchise.

But instead, Mr Byers opted to extend GNER's franchise by only two years - to April 2005.

In making his ruling, he rejected a recommendation by the Strategic Rail Authority (SRA) that a 20-year franchise should be awarded on the route. It is believed the SRA had come down in favour of GNER in its recommendation.

Earlier this week, the Transport Secretary said he favoured shorter contracts as a way of forcing train companies to improve. Critics pointed out that such short-term contracts gave train operators little incentive to invest in new rolling stock.

Mr Byers said a two-year extension would lead to "early placement of orders for a new fleet of intercity trains".

But GNER said last night that new trains would not be ready for years.

A spokesman said: "Buying trains isn't like buying cars. They have to be made to exacting specifications. Even if we placed an order tomorrow, it would be about five years before they were in service."

Passenger groups and North-East decision makers expressed disappointment with the announcement.

Rachel Spence, head of policy at the North-East Chamber of Commerce, said: "The Government has fudged the decision. This will be bad for the region as the line won't get the investment it badly needs.

"We needed a long-term decision that would lead to the development of the line, not a stop-gap measure. It seems that the Government couldn't make up its mind.

"The region will lose out on inward investment projects, which will opt to go to the North-West because of the investment already promised in its rail network."

The Association of Train Operating Companies said the two-year ruling had "created great uncertainty within the industry", while the Rail Passengers Council said the decision reflected "the underlying problems of funding and structure of the railways".

Virgin Trains said it was disappointed there had not been a clear commitment to either bidder.

The SRA was plainly surprised by the Transport Secretary's announcement.

A spokesman said Mr Byers' decision was a "change of policy, a change of tack due to an altered picture".

He said: "We have been working for several months and made recommendations on the basis of a 20-year franchise."

A Department of Transport spokesman said the uncertain costs of upgrading the line had led to the decision. It had not been feasible to offer a 20-year contract.