Chris Grayling faced calls to resign after a controversial no-deal Brexit ferry contract awarded to a firm with no ships was cancelled.
The Transport Secretary's decision to award Seaborne Freight a contract worth £13.8 million to run services between Ramsgate and Ostend had attracted widespread criticism.
The Department for Transport (DfT) said it had decided to terminate the contract after Irish company Arklow Shipping, which had backed Seaborne Freight, stepped away from the deal.
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A DfT spokeswoman said: "Following the decision of Seaborne Freight's backer, Arklow Shipping, to step back from the deal, it became clear Seaborne would not reach its contractual requirements with the Government. We have therefore decided to terminate our agreement.
"The Government is already in advanced talks with a number of companies to secure additional freight capacity - including through the port of Ramsgate - in the event of a no-deal Brexit."
'The Grayling catalogue of calamities'
Labour seized on the situation to say Mr Grayling should quit or be sacked.
Shadow transport secretary Andy McDonald said: "As we predicted, the Seaborne Freight contract has been cancelled.
"This cannot go without consequence. The Chris Grayling catalogue of calamities grows bigger by the day.
"This contract was never going to work but this Secretary of State, true to form, blunders from one disaster to another.
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"Whilst Theresa May needs the few friends she has right now, we cannot have this incompetent Transport Secretary carry on heaping humiliation after humiliation on our country. He has to go."
Mr Grayling last month defended the Seaborne Freight contract, insisting it was "not a risk".
It was one of three firms awarded contracts totalling £108 million in late December to lay on additional crossings to ease the pressure on Dover when Britain leaves the EU, despite having never run a Channel service.
The department said it had been Arklow Shipping's backing that gave it confidence in the viability of the deal, and that it stands by the robust due diligence carried out on Seaborne Freight.
It added no taxpayer money had been transferred to the company.