London, Tilbury and Southend Rail, due to take over the so-called "misery line" from London to the Essex coast, was told it could not begin operating until an inquiry into the fraud claims was complete.
It is alleged that a senior official of LTS systematically cheated another rail operator.
Brian Wilson, Labour's trade and industry spokesman, called on the police to investigate the alleged fraud, understood to involve season tickets from London's Fenchurch Street station being reissued at Upminster at the eastern edge of London, so depriving London Underground of a portion of the fare. London Underground is estimated to have lost pounds 30,000 a month.
Mr Wilson said: "Not even the Tories could hand over a rail franchise to a company which is now under the cloud of these allegations of systematic fraud."
The Government intervened quickly last night to suspend the handover of the franchise to LTS Rail. The company was due to begin services from the capitalat 5.35am today.
Sir George Young, Secretary of State for Transport, said: "The franchising director has informed me that in view of the apparent ticketing irregularities at LTS Rail he does not now expect to transfer the company from BR to the private sector until after the conclusion of the investigations currently being undertaken by the rail regulator and the British Railways Board respectively."
LTS refused to comment last night, but informed sources said one of the company's directors had resigned. During the suspension of the franchise transfer, BR will continue to run the services.
Sir George said the other two franchises due to go ahead today - Great Western Trains, operating out of Paddington to Bristol, the West Country and South Wales, and South West Trains, taking over services from Waterloo to Hampshire, Dorset and the Surrey commuter belt - would go ahead as planned.
The Transport Secretary also welcomed the fact that "apparent irregularities were detected so quickly prior to transfer". However, the suspension of the franchise handover could not have happened at a more embarrassing time for ministers. The inquiry will put the privatisation process on the Essex route back by months, and could force a new franchise competition.
Mr Wilson said: "This goes to the heart of rail privatisation. In a fragmented railway, every company will have a vested interest in maximising its own revenue by fair means or foul."
Train spotters, page 5
Inside Story, page 18