The deal to award West Ham the Olympic Stadium after the London 2012 Games has collapsed, the government has confirmed.
The board of the Olympic Park Legacy Company (OPLC) has ended negotiations amid concerns over delays caused by the legal dispute with Tottenham.
The OPLC, government and mayor of London have instead agreed the stadium will remain in public ownership.
West Ham welcomed the move and said it would bid to be the stadium tenant.
The OPLC has been asked to start a new process to secure tenants for the stadium and any interested bidders will have to submit proposals by January.
Sports Minister Hugh Robertson said the government was committed to securing a legacy from the Olympic Stadium, which it wants reopening in 2014.
"The process to sell the stadium has become bogged down. We are acting today to end the legal paralysis that has put that legacy at risk
"Ending the current sale process and looking for a leasehold solution will remove the current uncertainty and allows us to help secure the future use of the stadium with more confidence," he said.
"We know there is huge interest in the stadium out there from private operators and football clubs and, crucially, we remove any uncertainty.
"This is not a white elephant stadium where no one wants it. We have had two big clubs fighting tooth and nail to get it."
A fund of £35m has been set aside from public money to convert the 80,000-capacity stadium at Games time to a 60,000-seater venue afterwards.
West Ham United and Newham council said in a joint statement: "Our bid is the only one that will secure the sporting and community legacy promise of the Olympic Stadium - an amazing year-round home for football, athletics and community events of which the nation could be proud."
Both Tottenham and Leyton Orient launched a legal challenge against the original decision to award the stadium to West Ham.
Following the collapse of the negotiations, Leyton Orient's chairman Barry Hearn said: "This represents a total victory for Leyton Orient football club and we are delighted."
Tottenham is yet to respond to the government's confirmation that West Ham's original deal with the OPLC had collapsed.
The post-Games stadium will be capable of hosting major athletics events and Premier League football.
That opens the possibility for Championship football club West Ham and their bid partner Newham Council to submit a new, lower risk proposal which could still see them move in after London 2012.
With West Ham's finances under strain following their relegation from the Premier League last season, the new arrangement could be much more attractive as it would only cost about £2m a year to lease the stadium.
That money will help offset estimated running costs of more than £5m a year.
Spurs are seeking a judicial review of the earlier decision to let West Ham buy the stadium and the next hearing at the High Court was due to be held next Tuesday.
And despite London Mayor Boris Johnson's ultimatum to Spurs last week to settle the dispute before next Tuesday and accept a funding package to help redevelop their White Hart Lane ground, the OPLC had lost confidence in a quick resolution.
Following the latest development, Mr Johnson said: "I am confident that this decision is the best way to ensure we have certainty over the stadium's future.
"We will keep it in public hands but we will effectively rent it to a football club, almost certainly West Ham, and that will cover the costs and I think it will be a very good deal for the taxpayer."
The clock is ticking for the OPLC because it has set a deadline of 2014 for the new tenants of the stadium to move in.
For that to happen, planning permission must be submitted by March 2012 to ensure work starts immediately after the Games.
The prospect of a never-ending battle in the courts raised fears that the stadium could lie idle for years after the Olympics had finished.
The other catalyst for the U-turn is London's bid for the 2017 World Athletics Championships.
Last week's visit of the inspection team from the International Association of Athletics Federations (IAAF) was dominated by the continuing uncertainty over the stadium's future and, in particular, the running track.
With London facing a real contest against Doha in November's vote, the government and mayor wanted to send a strong message to the IAAF that they are committed to staging the event in the Olympic Stadium.
Ed Warner, chair of the UK Athletics board, said: "I think this is a bold and decisive move by the legacy company, supported obviously by the mayor and the government.
"It means the stadium will open for athletics in the summer of 2014, which was always the plan."
Former Olympics Minister Tessa Jowell said the new arrangement honoured the long term legacy pledge made during the bidding process.
She said: "The important result here is certainty, is that there is no blight caused by these negotiations - continuing negotiations driven by legal process with Tottenham - and that the communities of east London have the guarantee of access to the Olympic stadium after the Games."
But the latest twist to the controversial saga will raise serious questions about how such an important decision could be thrown back into confusion with just 10 months to go to the Games.
There will also be concerns over why another £35m of public money is going to be poured into a stadium which has already cost over £500m.
Jim Fitzpatrick, Labour MP for Poplar and Limehouse, said he was "very disappointed" by the new decision on the stadium but believed West Ham's plans were "much more focused" than others.
http://www.bbc.co.uk/news/uk-15251893
