The closure of thousands of post offices looks set to be announced next week, with rural loss-making outlets likely to bear the brunt of the cuts.
Campaigners have fought to save rural post offices
The Royal Mail has told the government it could shut 10,000 outlets and still run a viable commercial service.
The Department of Trade and Industry said that scale of cuts was "not on the table" but the current size of the network was "unsustainable".
It is due to announce the details of planned closures on Thursday.
The post office network was 18,000-strong in 1999, but now stands at about 14,000.
The network is said to be making huge losses, and a current £150m-a-year subsidy for the rural network is due to be withdrawn in 2008.
Newspaper reports say the government will propose closing 2,500-3,000 post offices, which is about a fifth of the network.
Closures are likely to be phased in over several years.
A DTI spokesman confirmed an announcement would be made next week, but said none of the details would be confirmed before then.
"We recognise the wider social role of the post office in communities," he said.
"But also there is widespread recognition that the current size of the network is unsustainable."
A Royal Mail spokesman said: "The future size of the network depends entirely on the government's decision on the level of funding it's prepared to put out."
A long battle by campaigners has seen four million people sign a petition calling for rural post offices to be saved.
POST OFFICES IN CRISIS
Despite subsidies of £150m, post offices lost £111m in 2005
Postcomm estimates 1,500 of 8,000 rural post offices make money
72% of sub-postmasters are uncertain about the future, says Postcomm
Revenue from services withdrawn from post offices fell £168m in past year
Colin Baker, general secretary of the National Federation of Subpostmasters, said a recovery package was needed.
He said local post offices were struggling because more people were shopping on the internet and telephone and in larger towns.
Post offices needed to introduce more modern products and services - as they had done with foreign currency and travel insurance - to keep them going, he added.
The Federation of Small Businesses said closing post offices did "not make sense".
"Any money they save by closing post offices will be more than outweighed by lost taxation revenue that will occur through reduced small business productivity," said spokesman Matthew Knowles.
"Since many high streets have lost their banks the post office is the only option left.
"Now small business owners have to travel further to deposit cash, increasing congestion and reducing the number of hours spent growing the business."
Conservative MP Peter Luff, chairman of the Trade and Industry Select Committee, said wholescale closures were not necessary and ran "completely contrary to the interests not only of rural Britain but of deprived urban areas too".
The government has been accused of making things worse for post offices with the withdrawal of key contracts such as the Post Office card account, which is used to access pensions and benefits.
Liberal Democrat trade and industry spokesman Edward Davey said: "Ministers' claims that post offices must close in their thousands are simply wrong.
"These closures have been government-driven as ministers have taken away businesses like pensions, TV licences and passports."
BBC political correspondent Mark Sanders said that next week some form of successor to the card account would be announced, "in an attempt to soften the blow".