The DWP said the termination of the £500m contract, which comes after the department complained of "significant quality failures" and Atos said it wanted to exit, would not involve "a single penny of compensation from the taxpayer".
The development worsens what was described as a "torrid" political climate for public sector outsourcers by Weber Shandwick public affairs chairman Jon McLeod.
Atos is the latest on a list of companies, which includes A4E, G4S and Serco, to be publicly shamed for either shortcomings or wrongdoings in this parliament.
While there is solid cross-party consensus that it is acceptable for the Government to outsource work, private operators have been attacked by Labour on the issue of competence and of predatory pricing.
Shadow work and pensions minister Liam Byrne urged the Government to sack Atos from the Work Capability Assessment contract, which involved determining whether people claiming incapacity benefit were eligible for a replacement benefit, employment support allowance.
Emotive cases, such as people who were cleared for work by Atos dying weeks later, led Dennis Skinner MP to brand the company a "cruel, heartless monster" last year.
The assessments themselves were controversial and were seen as a "pretty blunt instrument", says McLeod, who questions how easily the Government will find a successor to Atos.
"Do other outsourcers want the brand damage that goes with delivering a service which is seen as unduly harsh?" he asks. "It will take a pretty ballsy operator to do it."
Chris Rumfitt, founder of Corporate Reputation Consulting and former MD of public affairs at Edelman, believes the example of Atos will drive up the future cost of the contract, which the DWP is aiming to reallocate in 2015.
"The Government will have a harder time finding a provider that will take the reputational and commercial risk of the fit-to-work contract. Outsourcing companies will do it but they will price in these risks and the public sector will end up paying more than it needs to," he says.
McLeod believes that the Government first needs to show it is listening to concerns from disability groups. The two parties in the future contract should then address the situation by working together to communicate why the assessments are in the public interest and build support for them across the political spectrum.
Rumfitt says he is sympathetic to outsourcers but admits that examples such as G4S and Serco overcharging the Ministry of Justice for prisoner tagging have undermined public trust.
When a provider gets involved in a public row with the Government it becomes "stuck between a rock and a hard place", he points out. "They want to defend their reputations but they don’t want to displease their customer."