INDIANAPOLIS — Indiana fired IBM Corp. on Thursday as the lead contractor on an ambitious, $1.34 billion project to automate applications for food stamps, Medicaid and other welfare benefits.

Gov. Mitch Daniels said the state informed IBM that it will lose its 10-year contract within 60 days because the Armonk, N.Y.-based company made too little progress to fix poor service as required by a corrective action plan ordered last spring.

The state’s Family and Social Services Administration will develop a detailed plan by Dec. 14 for a “hybrid system” that Daniels said will incorporate successful elements of Indiana’s old, face-to-face welfare system along with the call centers, document imaging and other automation IBM and its partners introduced.

The new system will involve companies that had worked with IBM, including Affiliated Computer Services Inc. of Dallas. Those companies now will work directly for FSSA, the project’s new leader, FSSA spokesman Marcus Barlow said.

“Basically, we’re cutting out the middle man,” Barlow said.

IBM spokesman John Buscemi said the company believed it was making progress under the corrective action plan submitted July 1. The recession and high unemployment led to more demands on the welfare system, making the changes more difficult, he said.

“IBM rejects the state’s claims and believes the state’s actions are unjustified,” Buscemi said. Asked whether the company was considering suing the state, he said: “IBM will take action as appropriate to protect its rights under its contract with FSSA.”

Federal officials, some members of Congress and the government services industry have scrutinized Indiana’s welfare automation effort after a similar one run by Accenture in Texas failed in 2007.

In Indiana, automation was introduced in 59 counties representing about a third of the state’s 1.2-million person caseload, but complaints of lost documents, delays in approving benefits, lengthy call hold times and severed eligibility for Medicaid and food stamps prompted the state to halt further expansion until IBM fixed the problems.

Daniels said Thursday federal welfare officials are backing what he termed a “major midcourse correction.”

House Speaker Patrick Bauer, D-South Bend, commended Daniels for breaking the contract.

“I think it’s the right thing to do, to recognize when you make a mistake, to adjust, regroup, because there were too many people suffering, too many people’s lives in danger,” Bauer said.

Rep. Suzanne Crouch, R-Evansville, who has been among lawmakers and other critics calling for caseworkers to have more contact with clients, said she hopes the new approach succeeds.

“I believe that bringing together the human interaction of the old system and the technology of the new system will ensure that needy Hoosiers get the service they deserve,” Crouch said.

U.S. Reps. Andre Carson and Baron Hill, both D-Ind., asked Agriculture Secretary Tom Vilsack last summer to review his agency’s approval of the IBM contract. The Agriculture Department oversees the food stamp program.

“I am hopeful that the Governor’s decision is a sign of serious action being taken to correct these problems and get services to those in need,” Carson said in a statement.

Barlow said the hybrid system in development will allow people to apply for benefits in person, on the phone or through the Internet. However, instead of all case workers statewide having access to individual files, cases will be assigned to county-level teams.

“There will be much more of a local focus,” Barlow said.

ACS spokesman Ken Ericson said the company remained “fully committed to the success of this project” and was working with FSSA on the new plan.

Daniels has said repeatedly that he inherited one of the nation’s worst welfare systems, which was troubled by fraud, high error rates, long customer wait times and slow progress in moving people from welfare to work. He said some reforms have worked.

“The fraud appears to have stopped, and we’re still on track to save taxpayers hundreds of millions of dollars, but the intended service improvements have not been delivered and that’s not acceptable,” Daniels said.

The cost of the contract, initially $1.16 billion, had risen 15 percent, to $1.34 billion, under changes made to the agreement. Through June 30, the state paid IBM $355.9 million.

FSSA Secretary Anne Murphy asked IBM to prepare a corrective action plan last spring after expressing her concerns over the company’s performance to Daniels.

Buscemi said IBM succeeded in introducing call centers, document processing and other automation to Indiana’s welfare intake. A Web portal brings in almost two-thirds of all applications, he said.

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Associated Press Writers Mike Smith and Deanna Martin contributed to this report.