The BBC's Stephen Evans reports on reaction to the proposals

Mr Mandelson announced the level of profit the Post Office paid to the Treasury would be cut from 80% to 40%, freeing up the difference for investment.

He told the Commons an independent regulator would be established for the post service.

Mandelson: Commons statement imminent

"The government's role in the Post Office will be restricted to the strategic level," he said.

"The Post Office board will become clearly accountable for its success or failure in running the business."

Referring to Germany's intention to privatise its mail service, he said a minority stake sell-off could occur at a later stage.

But he said talks with Post Office managers had convinced him any moves towards privatisation would not bring the changes the service needs.

Peter Mandelson on Radio 4's PM: "It's not a free lunch for the Post Office - there are very tough market disciplines"

He described his proposals as "the most radical set of reforms since the modern Post Office was created in 1969".

The changes would allow the Post Office to engage in more commercial activities and end its monopoly status in some areas, he said.

Mr Mandelson added: "We are ushering in the start of a confident, bright new dawn for the Post Office and are looking to its management and its workforce to seize the opportunities putting right the neglect of the past."

John Redwood: Branded the reform "the worst of all possible worlds"

The Conservatives responded to the announcement by saying it was as "full of holes as a Gruyere cheese".

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

He said: "It offers the worst of all worlds - the taxpayer loses money while the Post Office still does not know where it stands on investment."

John Redwood speaking earlier on BBC Radio 4's Today programme

He said the changes left the Post Office with "both hands tied to the Treasury".

The Post Office itself welcomed the reform, saying it wanted more choice for its consumers provided this was balanced by its own greater commercial freedom.

Chief executive John Roberts told BBC Radio 4's PM programme the service had been promised about £1bn over five years.

Post Office chief executive John Roberts promises benefits for customers

"For the first time in many years, we've got a government that's saying something positive about the future," he said.

"This will mean we can really invest in the business in the way we've been stopped from doing in recent years."

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

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

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

The general secretary of the communication workers union, Derek Hodgson, said his members were pleased by Mr Mandelson's decision.

"It is a solution we will support and we believe it is the right way for the Post Office to go for the future," he said.

Mr Hodgson added that he was convinced the changes would work and end talk of privatisation of private shareholders.

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

Under the new model the Post Office would be allowed to invest funds and borrow.