Three government officials at the heart of the abandoned west coast mainline franchise competition have been suspended after the transport secretary launched an urgent review into how the award of Britain's most lucrative rail service ended in fiasco.

Patrick McLoughlin said he was angry and that the fault lay "only and squarely within the Department for Transport". The shock move looks set to revive the apparently doomed Virgin Trains after the government admitted to "significant flaws" in the franchise process that was won by FirstGroup.

Taxpayers now face paying compensation of £40m to the original bidders - something the Labour leader, Ed Miliband, called a disgrace.

Virgin and McLoughlin will be holding talks to discuss options later on Wednesday, with the tender process likely to be rerun. Until Tuesday the transport secretary had, like his predecessor Justine Greening, defended the "robust" process, and he was set to invite the state-owned Directly Operated Railways (DOR) to run the service when the current franchise expires on 9 December had Virgin's legal proceedings delayed the new contract with FirstGroup.