An independent panel set up by the Government also found there was a "substantial threat" to the financial stability of the Royal Mail and the universal postal service.

"We have come to the conclusion, based on evidence submitted so far, that the status quo is not tenable. It will not deliver our shared vision for the postal sector," said the report. The panel's chairman, Richard Hooper, said the Royal Mail and the postal industry were at a "crossroads", and there was now a "strong case" for taking action to make sure the company had a sustainable future.

"As we see rapid changes in the way people communicate, the way in which the postal sector is regulated will also need to change, and we need to establish how best to create the incentives for Royal Mail to modernise its operation, providing a stable, financial future."

The report said the postal market was changing and faced an "uncertain future", especially as firms looked to cut costs in the face of challenging economic conditions.

In the past two years, competition in the collection, sorting and transportation of bulk mail from businesses has expanded rapidly and much more quickly than was anticipated, the report found. But there was virtually no competition to the Royal Mail in the delivery of letters despite a belief that some rival firms could invest in deliveries, perhaps twice a week, in urban centres.

"Others point out significant barriers to entry. We will need to consider this further, along with the risk that more extensive competition could make the universal service unsustainable."

Large firms had seen clear benefits from liberalisation, including more choice, lower prices and more assurance about the quality of the mail service, the report said. But there had been no significant benefits for consumers and smaller businesses, who believed that Royal Mail's service offered good value for money as it stood.

The report added: "But they have no choice in provider and are paying higher stamp prices. The introduction of a pricing methodology based on weight and dimensions makes life more difficult."

Abolishing Sunday collections and the move to a single daily delivery were more visible to consumers and small firms and were seen as a reduction in services. The Royal Mail faced "many challenges", but modernising its services will be more difficult as volumes fall.