GNER currently operates the east coast route
GNER currently holds the franchise for the line but Sir Richard Branson's rival Virgin Trains had been pushing hard for control of the 400-mile route.
Transport Secretary Stephen Byers said he would not be awarding a long-term franchise and instead announced that he would be asking the Strategic Rail Authority (SRA) to negotiate an extension to the existing franchise currently held by GNER.
The company would be offered an extra two years in return for new trains and an improved service between London and Leeds.
There would also have to be a commitment to station refurbishments on the Kings Cross to Edinburgh line.
Mr Byers said that it was "premature" to commit to a long-term franchise and the proposal to extend the GNER franchise until 2005 was geared towards seeking new benefits for rail passengers.
The minister pointed to last year's east coast line crash at Hatfield, in which four people died and major concerns were raised about rail safety.
He said: "I regret that the process to negotiate a new 20-year deal has not proved successful.
"But since the Hatfield crash it has become clear that a lot more work has still to be done to develop this major infrastructure upgrade."
Mr Byers said people on the east coast route "have had a difficult time since Hatfield and deserve better".
Addressing the existing franchise holder's record, he said: "GNER has been widely commended as one of the best train operators and I hope they can work with the SRA to deliver benefits to passengers.
"I am not ruling out a 20-year franchise for the line. But circumstances have changed completely since bids were first invited for this particular franchise.
"The second stage of the East Coast main line upgrade does not yet have a finalised design or cost, and is not due for completion until 2006 at the earliest."
Mr Byers' decision came after he asked the SRA to consider short-term franchises on some routes.
However, concerns have been raised that the minister has adopted a short term approach which would discourage investment.
A Virgin Trains spokesman said: "After an 18-month process, we are disappointed that there has not been a clear commitment to the replacement plans of either bidder.
"We remain confident that our medium/long-term plans are the best way forward for East Coast."
Virgin has been invited to a meeting with the SRA to discuss the decision.
The Association of Train Operating Companies said the two-year extension decision sent "confusing signals" to the rail industry.
Director general George Muir said: "We understand there are practical difficulties, but on the face of it this looks like a return to the stop-go investment decisions which have caused so much damage and which we thought had been ended with the publication of the government's 10-year transport plan."