The English second tier club could still end up renting the facility under the new plan to keep the stadium in public ownership and the Olympic Park Legacy Company (OPLC) has been asked to start a new process to secure tenants.
The move comes amid a protracted dispute with Premier League side Tottenham Hotspur and the plan is committed to safeguarding the legacy of the stadium's athletics track which is central to a bid to host the 2017 World Championships.
"The process to sell the stadium has become bogged down," Sports Minister Hugh Robertson said in a statement.
"We are acting today to end the legal paralysis that has put that legacy at risk.
"Ending the current sale process and looking for a leasehold solution will remove the current uncertainty and allows us to help secure the future use of the stadium with more confidence."
Robertson added the government wanted to see the stadium re-open in 2014, while West Ham were quick to express their desire to still become tenants at the venue which has cost around 500 million pounds to build.
If West Ham were to win the bid again, any rental agreement is likely to save the club money compared to the original plan, which is likely to be welcome news for the outfit who were relegated from the Premier League last season.
The 35 million pound cost of transforming the stadium after the Olympics is already budgeted for within the 9.3 billion pound public sector funding package for the Games. It will be downsized from its 80,000 Olympic capacity.
"I believe it will... put us in the place where we always intended to be - delivering a lasting sustainable legacy for the stadium backed up by a robust but flexible business plan that provides a very good return to the taxpayer," London mayor Boris Johnson said in a statement.
LEGAL BATTLE
West Ham were selected to inherit the stadium, the centrepiece of the July 27-August 12 Games, in February before Tottenham Hotspur sought a judicial review saying a 40 million pounds loan from Newham Council gave West Ham an unfair economic advantage and made the decision unlawful.
Tottenham had been given a three-week ultimatum to accept a 17 million pounds package to stay in North London and drop the legal battle over the future of the stadium, which is in East London and nearer to West Ham's current Upton Park home.
Spurs, who have alternative plans for a new ground close to their White Hart Lane stadium, backed the OPLC decision but gave no clues as to whether they would join the race to rent.
"We firmly believe that the bid we put forward was, in fact, a realistic sporting solution for the stadium, along with a substantial return to the taxpayer, community programming and athletics provision," they said on their website.
A joint statement by the West Ham vice chairman Karren Brady and Kim Bromley-Derry, chief executive of the London Borough of Newham, also welcomed decision and was more clear-cut about future plans.
"West Ham will look to become a tenant of the stadium while Newham will aim to help deliver the legacy," it said.
Keeping the stadium in public ownership is likely to safeguard the athletics track, which was one of the key legacy promises London gave when bidding for the 2012 Games.
The track, which was laid earlier this month, is also vital to the British capital's bid to host the 2017 athletics world championships and the legal row with Spurs had threatened its existence given Tottenham are not in favour of keeping it.
UK Athletics chairman Ed Warner said the government and OPLC had taken a "bold, decisive move."
"I'm absolutely delighted," he told Sky Sports News.
