Passengers who suffer delays on its West Coast Mainline and Cross Country Trains services will be offered "no quibble" refunds regardless of who was at fault.
Virgin Trains, which has attracted more complaints than any other operator since privatisation, has also agreed to stricter performance targets.
Refunds are usually payable when a train is running 60 minutes late, but on services between Euston and the West Midlands refunds will be payable when a train is 45 minutes late. The size of the refund will also increase from 20 to 25 per cent and for delays of more than two hours, passengers will get all their money back.
The new conditions have been agreed with John O'Brien, the franchising director, in return for regulatory approval for the bus group Stagecoach to take a 49 per cent stake in Virgin Trains. Stagecoach is paying pounds 138m for the stake.
Other passenger benefits agreed between Virgin Rail and the franchising director include through ticketing arrangements in 30 towns and cities and new bus links to stations.
Five new bus links to stations served by Virgin will be introduced and a further five are being evaluated. Virgin and Stagecoach have also agreed to allow rail passengers to buy add-on return bus tickets to 21 towns for pounds 1 each. Mr O'Brien said the package was a "substantial step" towards promoting the integrated transport policy set out in Mr Prescott's white paper earlier this year.
However, Save our Railways, the pressure group, criticised elements of the package, arguing that in many cases the new bus links would duplicate existing or proposed rail routes.
Welcoming the agreement with Virgin, Mr Prescott said: "This is not a franchise renegotiation. But it is an important step towards the kind of improvements I wish to see, and it will provide long-suffering passengers with much-needed improvements."
Virgin Trains ran into trouble after trains carrying delegates to the Labour Party conference in Blackpool were delayed.
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