Image caption HMP Lindholme near Doncaster was one of those open to bids

Plans to privatise three prisons have been cancelled because of an ongoing investigation into the leading bidder.

Justice Secretary Chris Grayling said the prison service would remain in charge at Hatfield, Lindholme and Moorland, all in South Yorkshire.

Serco was named as the leading bidder in July but the company has been accused of over-charging the government for electronically tagging criminals.

Mr Grayling said the privatisation was cancelled for "operational reasons".

"The investigations remain ongoing," he said in a statement.

"The impact of the delay and the uncertainty this has created mean that for operational reasons we cannot postpone the outcome of the competition process any further.

"I have therefore decided that the competition for these prisons will cease and that all three prisons will be managed by HM Prison Service."

Plans 'in tatters'

Labour's shadow justice secretary Sadiq Khan called the decision a "humiliating climbdown".

Analysis Despite some uncomfortable headlines, the government remains committed to giving private companies more responsibility for running public services. Ministers argue that the procurement process has been improved in recent years, with better services being delivered at lower cost. So halting the privatisation of three south Yorkshire prisons is something of an embarrassing setback. But the political logic was clear - you really can't put a company which is under criminal investigation itself in charge of the nation's jails. The bigger problem for the government is that the decision has raised questions about the whole process of contracting out services to the private sector. The justice secretary Chris Grayling said today that the government is still fully committed to what he called "a mixed market for public services". Yet he also admitted that the publicly-run Prison Service has significantly reduced costs - and is currently delivering value for money. So the Prison Governors Association has declared there is no need for further contracting out. And there's political pressure from Labour - and some Lib Dems - to suspend the privatisation of the probation service, too. The government has the political will to go ahead, but may yet face practical difficulties if some of the potential bidders remain under the cloud of a fraud investigation.

"David Cameron and Chris Grayling's plans for the prison system are in tatters," he said.

"Their talk of a rehabilitation revolution is nothing but a pipe-dream. The severe shortage of prison places combined with cuts in staff is causing huge problems and is putting public safety at risk."

Serco and G4S are both subject to an investigation by the Serious Fraud Office.

An audit suggested they took money for tagging criminals who were dead, in jail, or never existed.

Both firms have been excluded from new government contracts while a review of their operations is carried out.

Serco said it understood that, given "the urgent need for change" at the prisons, the privatisation plans as they stood were not in the institutions' best interests.

Acting group chief executive Ed Casey said: "From meetings with the UK government, it is clear that the operational needs of the prisons will be best served by the necessary changes being implemented without further delay.

Mr Casey took over when Christopher Hyman resigned last month after almost 20 years with the company.

The move was greeted as "great news" by the Prison Governors Association union.

"It should be seen as recognition of the recent hard work completed in order to modernise and streamline the public sector prison service," president Eoin McClennan said.

Prison reform campaigners welcomed what they described as a ministerial "U-turn" but called for the government to go further.

Frances Crook, chief executive of the Howard League for Penal Reform, said the justice secretary should "reverse the justice privatisation tide currently being witnessed across the country".

She added: "Something as important as taking away someone's freedom should only be done by the state, answerable to voters.

But the Ministry of Justice insisted it "remained fully committed to a mixed market in public services".