Justice Secretary Chris Grayling was forced yesterday to cancel bids by notorious security privateer Serco to run three prisons.

He blamed "uncertainty" created by an investigation into Serco's public contracts following allegations of fraud, putting a stop to bids for Hatfield, Moorland and Lindholme prisons.

Prison officers welcomed the decision, which will keep the jails public, but called for further action.

"Public prisons can be run efficiently and effectively on behalf of society," POA union general secretary Steve Gillan said.

"We will continue to campaign on behalf of two public prisons which have been privatised - HMP Birmingham and HMP Northumberland - in order to secure their return to the public sector."

The Serious Fraud Office has begun a criminal investigation into the firm after it was alleged to have overcharged the government for electronically tagging offenders, some of whom were found to be back in prison, dead or abroad.

Serco and fellow privateer G4S have been barred from new contracts pending a wider review.

But Howard League for Penal Reform chief executive Frances Crook said private companies should be kept out of prisons entirely.

"Running prisons for profit means these multinationals cash in on others' misery, making more money out of increased levels of crime and a greater number of people being held in overcrowded cells," she said.

"Grayling should go further and continue to reverse the justice privatisation tide currently being witnessed across the country.

"Private firms are often much better at winning lucrative contracts than delivering the goods."

The cancellation of the prison bids followed claims that a Serco-run pilot for Mr Grayling's push to privatise probation had failed massively.

Its involvement in the community payback schemes in London - a precursor to Con-Dem plans to sell off most of the probation service.

Staff cuts and shortages have caused significant problems, affecting court cases.

The Ministry of Justice said there had been "bedding-in issues" but insisted that public safety "has not been compromised."

Probation officers said that was rubbish, with the sell-off likely to threaten public safety while privateers cream off money from the most profitable parts of the service.

Members of probation union Napo walked out on strike against the plans earlier this month.

Napo has promised more action if its concerns are not met.

National chairman Tom Rendon said probation officers in London were "finding it increasingly hard to enforce justice" because information supplied by Serco was "incomplete or it's late, or it's of dubious quality."

The government had taken the lowest bid, he suggested, "and now the cracks are really starting to show."

Napo general secretary Ian Lawrence told the Star that the rejection of Serco's prison bids had "filled probation officers with a lot of hope" that the trend will continue into the probation service.