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The loss-making East Coast Main Line will effectively be nationalised after transport group National Express was unable to pay £1.4bn back to the Government.

The company has failed to renegotiate the deal to pay back the money over the life of its franchise because passenger growth stalled during the recession.

Transport Secretary Lord Adonis said he had set up a publicly-owned company which will take over the London-Edinburgh line, probably at the end of the year.

He added that the Government may terminate National Express' other rail franchises - East Anglia and the London to Tilbury and Southern franchise c2c.

"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging," he said.

Train services on the East Coast Main Line will not be interrupted, Lord Adonis said.

National Express could be on course for a legal battle with the Government over its decision.

The company has taken "clear and detailed" legal advice and believes the Department for Transport would not have the right to recover losses from the breach of the franchise agreement, or take over its other rail contracts.

Union officials welcomed the return of the rail line to Government ownership after the "chaos" of privatisation.

Bob Crow, general secretary of transport union the RMT, said: "We welcome this renationalisation of the East Coast route but this shouldn't be a short-term, crisis measure.

"It should be a long-term solution to the chaos that privatisation has brought to the UK's most lucrative rail franchise.

"RMT's national conference will send a clear message to the Government today that they should strip National Express of their other franchises and use this opportunity to begin the process of renationalising the rail network."

The East Coast operation was expected to lose £20m in the first six months of this year.

Meanwhile, National Express' chief executive is resigning.

Richard Bowker, who joined the group in 2006, will leave at the end of August and will be replaced by Ray O'Toole.