The transport minister Grant Shapps has admitted the Northern rail franchise could collapse within months.
In a written statement to Parliament Mr Shapps confirmed Arriva Rail North (ARN), which operates the franchise, is in a very poor financial position and can realistically only continue on a short-term basis.
Mr Shapps said decisions now have to be made on how the franchise will be run, while stressing that jobs and services will remain unaffected.
It is expected that the future of the crisis-hit franchise will be known by the end of this month.
Prominent northern politicians and transport organisations have welcomed the move but the Government has also been savaged by rail union the RMT, which is calling for an end to private franchising.
In the statement Mr Shapps said: "On 16 October 2019 I informed the House, through the Transport Committee, that I had issued a request for a proposal to the current Northern franchisee, Arriva Rail North (ARN) and to the Operator of Last Resort as the first phase of securing options for the continuation of passenger services on the Northern franchise. This was triggered by concern over the financial position of ARN.
"It has now been confirmed to me from the most recent available financial information that the franchise will only be able to continue for a number of months. The proposal I requested from ARN is being evaluated.
"Following completion of this process I will consider whether to award ARN a short-term management contract or whether to ask the Department of Transport's own Operator of Last Resort to step in and deliver passenger services. Longer-term decisions on the franchise will be made in the light of the recommendations of the Williams Rail Review."
He added: "To clarify, the current financial position of the Northern franchise will not impact on the railway's day-to-day operations. Services will continue to run and there will be no impact on staff."
Asking the operator of last resort at the Department for Transport to step in would effectively mean the franchise is nationalised.
That would be welcomed by Transport for the North, which gave an optimistic response to Mr Shapps' words.
Strategic rail director David Hoggarth said: “This is an important day for rail users across the North of England. They, and we, have been calling for the restoration of reliable rail services across the network for almost two years now.
“Today’s announcement means that, finally, hard-pressed passengers can get the chance of a fresh start. We welcome the clear timeline for a decision to be made by the end of January.
"We’ve been clear that putting an Operator of Last Resort in place of Northern would be the only way to rebuild trust and confidence, and secure the right outcome for passengers.
“The North’s leaders have said that a direct award to Northern, even on a short-term contract basis, is likely to be seen by rail users as a reward for failure.
“A top priority for us is ensuring passengers are put first in this whole process - that includes continuing to deliver on improved services, on infrastructure, and on new trains.
We accept there is no silver bullet that will solve all the issues – that’s why it’s important that the Government also deliver a pipeline of significant investments in our railways as a matter of urgency.”
Greater Manchester Mayor Andy Burnham also expressed relief that the Government has stepped in, though made it clear how long the region has been waiting for action from ministers.
He also demanded the operator of last resort is used.
Mr Burnham said: "For months if not years we have been calling on the government to get a grip of the chaos on the railways of the North. We are pleased they have listened and today confirmed that Northern will be stripped of their franchise. Leaders across the North stand ready to work with Government to develop a solution that delivers for passengers.
"However, the Transport Secretary is still leaving open the possibility of Northern being given a new, short-term contract. How can it be right to reward an operator which has singularly failed to deliver an acceptable train service? This would be completely unacceptable.
"Finally, after years of misery for long-suffering passengers, we are beginning to see some light at the end of the tunnel. I urge the Transport Secretary to do the right thing for the travelling public in the North when he makes his decision at the end of the month."
The RMT union also backs nationalising the franchise but it gave a very different response, launching a withering attack on the current system and the Government.
RMT general secretary Mick Cash said: "This is just another fudge by the Tory Government on Northern but it still proves without a shadow of a doubt that their private franchise model for running our railways is finished. The whole privatisation experiment which has reduced our railways to chaos must now be consigned to the dustbin of history.
"This nonsense cannot go on. Today's decision by Grant Shapps makes a mockery of the imminent Williams Review which didn't even consider the public ownership model. The spivs and speculators who have spent 25 years bleeding Britain's railways dry should be told that the game is up for every single one of them and should be instructed to pack their bags and clear out.”
ARN and its Northern franchise have been at the centre of heated political discussion in recent days, with prime minister Boris Johnson telling Makerfield MP Yvonne Fovargue on Wednesday that "contingency plans" were being drawn up to replace Northern Rail.