Edinburgh have returned to the control of the Scottish Rugby Union following a summer-long dispute.
Bob Carruthers has been in dispute with the SRU
The SRU said the move was made by mutual agreement with franchise owner Bob Carruthers.
The club's coach, Lynn Howells, has been dismissed, with SRU head of player development Henry Edwards becoming the team's interim head coach.
Carruthers, who had been in charge for a season, had threatened court action to recover monies he said he was owed.
He claimed that the SRU had not forwarded to Edinburgh a seven-figure sum for Magners League and Heineken Cup fees.
Both sides had claimed that the other had broken their agreement.
The SRU this summer disbanded the Border Reivers because of financial problems.
There is now the exciting prospect of two credible and ambitious professional teams based in Scotland
SRU chief executive Gordon McKie
And there had been fears that Scotland would be left with one professional team - the SRU-controlled Glasgow Warriors - playing professional rugby in the coming season.
But the SRU, after briefing its staff on Friday morning, announced that a settlement had been reached that allows a team in Edinburgh to continue.
SRU chief executive Gordon McKie said: "This has been a challenging period for all concerned and, after many months of protracted and often difficult negotiations, we have arrived at a solution both parties can live with.
"From a Scottish Rugby perspective, we have always sought to act in the best long-term interests of the game and our focus can now be switched fully to continuing to grow the game at all levels in Scotland.
"There is now the exciting prospect of two credible and ambitious professional teams based in Scotland, which will of course be very much at the heart of the national governing body's priorities.
"We have assured the Edinburgh players there will be minimal disruption to their training schedules and preparations for the new season."
Carruthers has yet to comment on the SRU statement.
"With immediate effect, Scottish Rugby's agreements with Edinburgh Rugby Limited and its holding company, Murrayfield Sport and Leisure Limited, have been terminated by mutual consent," said an SRU statement.
"Both Scottish Rugby and Edinburgh Rugby have agreed to drop all claims against each other and, also with immediate effect, Scottish Rugby will be responsible once more for professional rugby in the capital.
"Scottish Rugby will now establish a new professional team to replace Edinburgh Rugby, which will include all existing players and the majority of the management and backroom staff.
"Both parties have agreed that acting managing director for Edinburgh Rugby Limited, Dean Lewis, and coach Lyn Howells will not be transferring to the new Edinburgh team."
Edwards would take control while the SRU asseses the coaching and management requirements of the new pro team.
Nic Cartwright has been appointed chief executive, a position he previously held with Harlequins.
"Scottish Rugby has agreed to make a settlement to Murrayfield Sport and Leisure to terminate that company's future right to be the exclusive concert promoter at the national stadium," said the SRU statement.
"And a further sum will be paid to facilitate the transfer of the goodwill and undertaking of Edinburgh Rugby to Scottish Rugby.
"Agreement was also reached on the clear understanding that Murrayfield Sport and Leisure and Edinburgh Rugby will use the settlement figure to discharge all remaining liabilities of those companies."