The government insists that renationalisation is not a "long-term" answer, and that its control over the service will last only until a new public-private partnership can be appointed in 2020.
The original London and North Eastern Railway was the second largest of the groups created by the Railways Act 1921.
The organisation, which has run the franchise with Virgin Trains since 2015, said it had been advised an "operator of last resort" would be appointed to run the London to Edinburgh service.
Rail, Maritime and Transport union general secretary Mick Cash said: "This is the second time that the Government have called upon the public sector to launch a rescue operation on the East Coast Main Line and instead of being a temporary arrangement Chris Grayling should listen to his staff and the public and make it permanent".
But when in private hands it failed not once, but three times, and the government has had to bail out the franchise once again.
"Deputy leader of City of York Council Andrew Waller said he would be writing to Mr Grayling immediately:to seek assurances and guarantees of stability for residents, commuters and workers in York".
Rail services on the East Coast Main Line will be brought back under public control following the termination of the franchise agreement with Virgin Trains East Coast (VTEC).
The Rail Delivery Group, the industry body for Britain's railways that includes state-owned Network Rail, pointed out today that Virgin Trains has invested more in the two years in which it has operated the route than DOR did in its five-and-a-half years running it.
The decision comes after the franchises could no longer meet payments due to lower passenger numbers and profits.
Stagecoach boss Martin Griffiths said he was "surprised and disappointed" at the government's decision.
Those advocating renationalisation across the piece should be asking themselves whether DOR would have been able to run the service it did had it been obliged to invest as much in the route as did Virgin Trains or if it were having to return as much to taxpayers as Virgin Trains.
Addressing the Commons, he also rejected criticism of the rail privatisation model pursued by the successive governments since the 1990s.
Shadow Chancellor John McDonnell said he is pleased to see Grayling "implementing first stage of Labour's Manifesto promise to renationalise the railways" following the announcement, and echoed Caroline Lucas's appeals for public ownership to be extended across the entire network.
Mr Grayling told parliament that Stagecoach and Virgin have lost nearly £200m, but that this had not been a loss to taxpayers "at this time".
The Transport Secretary told the Commons taxpayers "had not lost out" after operator, a partnership between Stagecoach and Virgin, "got their bid wrong".
In August 2007, National Express agreed a £1.4bn deal, but then handed it back to the government in 2009 against the particularly challenging background of the financial crisis.