The government has unveiled legislation which will allow the Post Office to become a public company to provide the service with a £600m cash boost.

The government will retain all the shares in the new public limited company and has insisted rural post offices will be protected by its plan to shake up the running of the service.

Under the proposals contained in the Postal Service Bill, the Post Office will receive a £600m cash boost over the next five years.

The service will be given greater commercial freedom to invest in the business, while a new consumer council will be established to monitor the organisation.

The Post Office has welcomed the proposals contained in the Postal Services Bill as a "springboard" to fight growing competition.

Trade and Industry Secretary Stephen Byers said modernisation was the key to the Post Office's future.

"It has served the country well for more than 350 years, but now it needs to change so that it can compete effectively in a rapidly changing domestic and international market," he said.

"Greater commercial freedom will ensure the UK has a world-class postal service for the 21st century offering consumers lower prices and better service while maintaining its highly valued public services."

The Post Office will now be able to borrow at commercial rates and its annual dividend to the government will be halved.

The bill will also enshrine in law a universal service at a uniform tariff.

An advertising campaign is to be launched confirming the government's commitment to the Post Office network and reassure claimants they would be able to collect benefits in cash after 2003, when changes to the collection system will be in place.

Post Office chairman Neville Bain said: "For the first time we are being given commercial freedoms which are vital if the Post Office is to achieve its ambition to be one of the world's top complete distribution companies.

"It gives us a springboard to meet and beat the growing competition around us."