The BBC's Stephen Evans: "Mr Mandelson is treading a middle way"

Trade Secretary Peter Mandelson is widely predicted to be ready to rule out privatisation of the Post Office.

The service has long been seen as a potential candidate for a sell off. The government is now understood to have decided to keep it in the public sector with large-scale changes.

The Department of Trade and Industry described imminent changes as "radical reform" to allow the Post Office greater freedom to compete in a growing global market.

Mandelson: Commons statement imminent

Mr Mandelson is to announce the proposals in a Commons statement, which could be followed by a white paper in the New Year.

But Shadow Trade Secretary John Redwood condemned the proposals as a fudge with none of the benefits of public or private ownership.

"It would be the worst of all possible worlds," he told BBC Radio 4's Today programme.

John Redwood and Martin O'Neill discuss Post Office reform on Radio 4's Today programme

"It means a big cut in the amount of money the Post Office gives to the Treasury, so there would have to be higher taxes or more borrowing, and the hands of the Post Office would still be tied and they wouldn't be able to compete properly with private operators.

"I think the public would like to see the Post Office competing globally and not just doing a good job nationally."

But the Commons Trade and Industry Select Committee chairman, Martin O'Neill, promised the reform would allow the Post Office to compete abroad.

He said the Post Office currently pays £380m to the government, on top of corporation tax, and this would now be used for investment.

Alan Jones: "There should be a level playing field"

Alan Jones, managing director of the courier firm TNT, welcomed the changes as they would level the delivery market.

"It's not good for anyone when there is a monopoly situation," he said.

"We do feel there should be a level playing field. At present, Parcel Force is exempt from VAT and all the other operators have to pay VAT - these things put as at a disadvantage."

Treasury loses out

Privatising the Post Office could have netted the Treasury £2bn, but would have proved unpopular with the unions, who would have waged a vigorous campaign to keep it in the public sector.

But Mr Mandelson is reported to support an independent, publicly-owned corporation (IPOC) model favoured by the Communication Workers' Union.

The Post Office has been pressing for the ability to borrow on the private money markets, make acquisitions, enter into joint ventures and have more flexibility on pay and bonuses.

It has been warning that without real commercial freedom its services could suffer.

Under the IPOC model the Post Office would be allowed to invest funds - which it cannot do at the moment because the Treasury takes 80% of its income. It would also be allowed to borrow.

The global market for letters and packages is worth £20bn a year but is increasing and forecast to reach £57bn a year by 2010.