The Northern Rail franchise will only be able to continue "for a number of months" according to most recent financial information, Transport Secretary Grant Shapps said.
In a written statement to the House of Commons, Mr Shapps confirmed that the Government could nationalise the franchise but said he would also consider the option of giving the current franchise holders, Arriva Rail North, a new "short-term management contract" to continue running trains.
The statement - which confirms previous comments Mr Shapps has made about the future of the Northern franchise - comes after months of complaints about the state of the service.
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Longer-term decisions on the franchise will be made in the light of recommendations of the Williams Rail Review, which is expected to be published shortly.
Mr Shapps' statement 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."
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Chris Burchell, Arriva's managing director of 海角视频 Trains, said: "We accept services on the Northern network are not yet good enough and we sincerely apologise to our customers for our role in that.
"Many of the issues affecting the franchise however are outside the direct control of Northern. Assumptions were given when the plan for the franchise was developed that critical infrastructure projects would be delivered to enable growth and support capacity demands.
"Many of these have either been delayed or cancelled. This, along with unprecedented levels of strike action, has had a significant impact on the franchise - both in terms of service and financial performance.
"These challenges will continue to affect services irrespective of who is running them.
"What is needed is a new plan and, in that analysis, we are fully in agreement with Government. That is why the Government asked us to prepare a business plan for a shorter 'Direct Award'."
Commenting on the statement, Northern Powerhouse Partnership director Henri Murison said: "While there has been a great public clamour for stripping Northern of their franchise, and a belated recognition that Trans Pennine Express are just as bad, the crying shame is that whoever operates the railways in the North will struggle to run good and reliable services because of the major infrastructure issues in and out of some of our major cities."
Transport for the North has now called on the Government to show full commitment to rail services for passengers as the franchise is re-assessed and re-allocated.
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Transport for the North’s 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.”