UPDATE 1-Britain scraps badly flawed 6 bln stg rail deal

* Govt: Serious mistakes in bidding process for rail franchise

* Process must be run again; three more on hold * Opposition accuses ministers of "shambolic incompetence"

* FirstGroup shares fall 15 pct; company says followed guidelines

(Adds Labour Party reaction; FirstGroup and Virgin comment; share price)

By Stephen Mangan and Peter Griffiths

LONDON, Oct 3 (Reuters) - Britain scrapped a 6 billion pound ($9.7 billion) deal on Wednesday to award one of the country's biggest railway franchises to FirstGroup Plc , blaming government officials for serious mistakes in the bidding process.

In an embarrassing U-turn, Transport Secretary Patrick McLoughlin said that "completely unacceptable" flaws had been found in the way rival bids to run the West Coast Main Line were calculated and the process would have to begin again.

Three more franchise competitions have been put on hold, raising questions about the government's handling of the privatised railways.

FirstGroup won the 13-year deal to operate the London-to-Scotland line in August with a bid of about 6 billion pounds, but the decision was challenged by Virgin Trains, a joint venture between Richard Branson's Virgin Group and FirstGroup rival Stagecoach .

Branson had called for a review because he believed that FirstGroup's numbers did not stack up and Virgin launched legal proceedings against the government in August in an attempt to prevent the contract from going ahead.

"I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process," McLoughlin said in a statement.

"A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held."

He ordered two inquiries into the mistakes and said that staff may be suspended.

Labour transport spokeswoman Maria Eagle said: "The West Coast rail franchise fiasco has yet again exposed the shambolic incompetence of this Tory-led government."

The move means that the Department for Transport (DfT) will no longer be awarding a franchise contract to run the West Coast service when the current contract expires on Dec. 9, and the bidding process will need to be re-run.

Shares in FTSE 250-listed FirstGroup plunged 15 percent when the market opened on Wednesday.

The company said in a statement that it was "extremely disappointed" with the government move and that it had only been told of the issue late on Tuesday night.

"Until this point we had absolutely no indication that there were any issues with the franchise letting process and had received assurances from the DfT that their processes were robust," it said.

It added that the government had made it clear that no fault lay with the company. "We submitted a strong bid, in good faith and in strict accordance with the DfT's terms," FirstGroup said.

In its trading update on Tuesday, FirstGroup had said that it was getting ready to run the West Coast line and was planning for a successful start on Dec 9.

Branson welcomed the government announcement.

"They have basically acknowledged that what we had been saying is correct," he said in a blog post.

"From the moment we found out that FirstGroup had been made the preferred bidder with a completely unrealistic bid, we questioned the way the offers had been assessed and asked government to review and explain how it came to its decision."

Evidence of "significant flaws" in the DfT's calculations emerged as officials were undertaking detailed evidence-gathering in preparation for the legal battle against Virgin Trains, the DfT said.

In light of the findings, the government said that it was no longer contesting the judicial review sought by Virgin Trains in the High Court.

It also said that it had postponed outstanding franchise competitions for the Great Western, Essex Thameside and Thameslink rail lines.

Two independent reviews into the way that the franchise process was conducted and the future of the bidding process for franchises are due to be delivered this month and in December, McLoughlin said.

($1 = 0.6196 British pounds)

(Additional reporting by Rosalba O'Brien; Editing by Chris Gallagher and David Goodman)

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