The company was unable to secure the extra £200 million needed to keep the business afloat following a full day of crucial talks with the major shareholder and creditors on Sunday.
Richard Moriarty, the chief executive of the UK Civil Aviation Authority (CAA), said the Government had asked his organisation to launch "the UK's largest ever peacetime repatriation".
In a statement, the CAA said: "Thomas Cook Group, including the UK tour operator and airline, has ceased trading with immediate effect.
"All Thomas Cook bookings, including flights and holidays, have now been cancelled."
Thomas Cook's chief executive Peter Fankhauser said his company had "worked exhaustively" to salvage a rescue package.
"Although a deal had been largely agreed, an additional facility requested in the last few days of negotiations presented a challenge that ultimately proved insurmountable," he added.
"It is a matter of profound regret to me and the rest of the board that we were not successful.
"I would like to apologise to our millions of customers, and thousands of employees, suppliers and partners who have supported us for many years.
"This marks a deeply sad day for the company which pioneered package holidays and made travel possible for millions of people around the world."
Prime Minister Boris Johnson has pledged to help holidaymakers stranded by the firm's closure, as he questioned whether bosses are not incentivised to prevent their business's demise.
Mr Johnson told reporters on board the RAF Voyager travelling to New York for the United Nations General Assembly that his thoughts were with customers.
He said: "It's a very difficult situation and obviously our thoughts are very much with the customers with Thomas Cook, the holiday makers, who may now face difficulties getting home."
"One way or the other the state will have to step in quite rightly to help stranded holidaymakers."
Transport Secretary Grant Shapps said dozens of charter planes, from as far afield as Malaysia, had been hired to fly customers home free of charge and hundreds of people were working in call centres and at airports.
Mr Shapps said: "Thomas Cook's collapse is very sad news for staff and holidaymakers.
"The Government and UK CAA is working round the clock to help people.
"But the task is enormous, the biggest peacetime repatriation in UK history. So there are bound to be problems and delays.
"Please try to be understanding with the staff who are trying to assist in what is likely to be a very difficult time for them as well."
The CAA's dedicated website for the firm's customers, thomascook.caa.co.uk, crashed shortly after the announcement.
The Department for Transport (DfT) said all customers currently abroad with Thomas Cook who are booked to return to the UK over the next two weeks will be brought home as close as possible to their booked return date.
Thomas Cook package holiday customers will also see the cost of their accommodation covered by the Government, through the Air Travel Trust Fund or Atol scheme, the DfT said.
Unions representing Thomas Cook staff, of which there are 9,000 across the group in the UK, had previously urged the Government to intervene financially.
A million customers will also lose their future bookings, although with most package holidays and some flights-only trips being protected by the Atol scheme, customers who have not yet left home will be given a refund or replacement holiday.
For those on holiday, the scheme will make sure they can finish their holiday and return home.
One of the world's oldest and largest travel companies, the firm had been trading for 178 years - having been established in 1841 by a cabinet maker who organised a day trip for temperance movement supporters.
According to its website, as of this year the group employed 21,000 people in 16 countries, operated 105 aircraft and 200 own-brand hotels and resorts.