The public transport operator said the UK Department for Transport has made a decision to appoint "Operator of Last Resort" for the East Coast train service and is "no longer considering" entering into a new franchise contract due to heavy losses incurred by Stagecoach and Virgin.
The firm has run the East Coast franchise with Virgin since 2015 and said that the two companies had been in negotiations with the Department for Transport for a new franchise contract.
"We will work constructively with the DfT and the OLR in the weeks ahead to ensure a professional transfer to the new arrangements, supporting our employees and maintaining the same clear focus on our customers as we have over the past three years".
Mr Grayling said: "In February, I gave the House an update on the financial problems on the East Coast Mainline, and indicated the current franchise would run out of money within months".
But Stagecoach reported losses on the line and in November past year Grayling announced that the franchise would be terminated in 2020 and become a public-private railway.
London North Eastern Railway will be taking over the East Coast Mainline from 24th June 2018.
Virgin Trains East Coast is the third private operator to fail to complete the full length of a contract to run services on the East Coast route.
The decision to end the £3.3 billion contract this year has been described as a "bailout" by Labour and trade unions.
In November 2014, Virgin Trains East Coast - a joint venture between Stagecoach and Virgin - was awarded the franchise to run trains for eight years.
"However, we respect the Government's decision".
"We are surprised and disappointed that the Department for Transport has chosen not to proceed with our proposals".
General Secretary Mick Cash said: "This is the second time 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".