The multi-million pound deal with Seaborne Freight prompted criticism and mockery after it emerged that the start-up company had no ships or history running a ferry service.
A spokesman for the Department for Transport confirmed Saturday that the contract had been pulled.
"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 spokesman said.
"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 government has been scrambling to put contingency plans in place to ensure goods can still flow smoothly if services between the English port of Dover and Calais in France are disrupted in the event the United Kingdom exits the European Union on March 29 without a deal. Dover is linked to Calais by a ferry crossing, as well as by the Channel Tunnel rail link under the English Channel.
Seaborne Freight planned to revive an alternative ferry route between Ramsgate, east of Dover, and Ostend in Belgium that closed five years ago.
The Department for Transport insists that it carried out "robust due diligence" on Seaborne Freight before awarding the contract. It was Arklow Shipping's backing of the company, not previously disclosed for commercial reasons, which gave it confidence in the deal, it said.
No taxpayer funds have been transferred to the company, it said.
Lawmaker Joanna Cherry, of the opposition Scottish National Party, tweeted that she would continue to pursue the question of whether the government breached procurement law in awarding the contract to Seaborne Freight.
Transport Secretary Chris Grayling last month defended the decision to sign a deal with the firm, saying it was "not uncommon that they do not own their own vessels and will be chartering them through third parties."
The contract was one of three that were announced, totaling £103 million. The other two went to established operators, Brittany Ferries and DFDS.
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