The firm that carries out assessments for disability claimants is quitting its contract early, the Government has announced.
Atos has been under fire over the number of assessments it has made as well as waiting times.
The Department for Work and Pensions (DWP) announced that the French firm is exiting from its contract to deliver Work Capability Assessments before it is due to end in August 2015.
Ministers stressed that Atos will not receive any compensation from the taxpayer for the early termination of the contract, and had made a "substantial" financial settlement to the DWP.
Claimants undergo a Work Capability Assessment when applying for Employment and Support Allowance, to see how their illness or disability affects their ability to work.
The DWP said last summer it had identified "significant quality failures" in the written reports produced by Atos following assessments.
An improvement plan was put in place, but the Government said it was now looking for a new provider to replace Atos.
The DWP said to ensure a smooth transition, one national provider will be appointed early next year to take over the contract. In the longer term it is intended to move to multiple providers to increase competition.
Mike Penning, Minister for Disabled People, said: "The previous government appointed Atos as the sole provider for carrying out Work Capability Assessments and since then we have carried out several independent reviews and made significant improvements to the assessment.
"Today we are announcing that we are seeking a new provider to replace Atos, with the view to increasing the number of assessments and reducing waiting times.
"I am pleased to confirm that Atos will not receive a single penny of compensation from the taxpayer for the early termination of their contract, quite the contrary, Atos has made a substantial financial settlement to the department."
Richard Hawkes, chief executive of the disability charity Scope, said: "I doubt there's a single disabled person who'll be sorry to hear that Atos will no longer be running the fit-for-work tests.
"We welcome the minister's decision. He now has a real opportunity for Government to review their approach to Work Capability Assessments and ensure that when they appoint a new provider there is a move away from a fundamentally flawed system.
"The question we have to ask is how many disabled people have jobs? Nine in 10 disabled people work or have worked, yet only about 50% of disabled people have a job right now.
"We need a back-to-work system that works for disabled people.
"Disabled people are pushing hard to find jobs, but they face massive challenges when it comes to finding and staying in work - too often they don't get the right kind of support and workplaces are still not flexible enough.
"The test should be more than an exercise in getting people off of benefits. It should make sure disabled people get the specialist, tailored and flexible support they need to find and keep a job. We should be talking about getting a million more disabled people into work."
Atos said in a statement: "Atos Healthcare has reached an agreement with the Department for Work and Pensions to allow it to exit from the Work Capability Assessment contract early, with a view to a new provider taking responsibility for delivery by 2015.
"Atos Healthcare will continue to deliver Work Capability Assessments until a complete transition has taken place to a new supplier. We will be transferring our infrastructure and employees to ensure consistency of service to those going through the process. There will be no change for those applying for Employment and Support Allowance."
Atos said it will continue to deliver the Personal Independence Payment (PIP) assessments in Scotland, north of England, London and south of England and to deliver Work Capability Assessments on behalf of the Department for Social Development in Northern Ireland.
Public and Commercial Services union general secretary Mark Serwotka said: "These privatised work assessments are fundamentally flawed and designed to harass vulnerable people and take their benefits away, rather than provide support and guidance.
"Doctors, MPs and disabled people all believe the tests should be scrapped so, instead of replacing the failed Atos with another profit-hungry provider, the Government should bring the work in-house and invest in it properly."
Richard Kramer, deputy chief executive at charity Sense, said: "Disabled people have been saying for some time that the system isn't working and Atos's decision to pull out of their contract is a reflection of these failures.
"There needs to be a root-and-branch reform of the system to ensure disabled people are judged fairly on their ability to work.
"The current points-based test is simply not responsive enough to people's individual circumstances and fails to take into account all of the factors that may limit their ability to work.
"The needs of the people that Sense supports are often complex and require specialist input that, in many cases, Atos simply hasn't been able to provide. It is vital that whoever replaces them is able to make a marked improvement to the system.
"However, ending Atos's contract will not fix all the underlying problems that led to so many people appealing their work capability assessment decisions."
Kate Green, shadow work and pensions minister, said: "People have been badly let down by Atos which is why Labour has repeatedly called on the Government to sack them with immediate effect.
"But changing the contract isn't enough. It's time for the Government to reform fundamentally Work Capability Assessments so that disabled people who can work are given support they need to find a job."
Citizens Advice chief executive Gillian Guy said: "The Work Capability Assessment is broken and innocent people are caught in the middle. Atos terminating its contract is not going to result in an overnight improvement in support for sick and disabled people. We need urgent root-and-branch reform of this whole system.
"In just one year, Citizens Advice Bureaux dealt with nearly half a million problems about Employment Support Allowance. Assessments are unreliable, often incorrect and can result in people with extremely tough medical conditions waiting months to get decent treatment and a fair outcome.
"This is a failing system, which ministers need to fix."