There was angry condemnation of the government's plans at the rally
Postal workers have been protesting in Westminster as the row grows over plans to sell off 30% of Royal Mail.
Over 120 Labour MPs oppose it, fearing full privatisation and job losses, and argue Labour made an election pledge to keep the Royal Mail in public hands.
Business Secretary Lord Mandelson said it was "absolutely clear" that the service would remain publicly owned.
But he told the BBC that new investment was sorely needed as Royal Mail "was in danger of running out of money".
Amid a row over the scale of Royal Mail's pension deficit, Lord Mandelson said the taxpayer could not be expected to fund potential liabilities in the region of £8bn without seeing an improvement in the performance of the company.
But there are signs the proposals, due to be introduced in the House of Lords on Thursday, are causing unease at the highest level of government.
The BBC's political editor Nick Robinson said there was disagreement on Tuesday over how the bill should be presented to Parliament at a meeting of a Cabinet sub-committee, responsible for legislation, chaired by Harriet Harman.
Although ministers deny any differences over the substance of the bill, Nick Robinson said there was anxiety about the prospect of a political fight the government may struggle to win.
Hundreds of postal workers and members of the Communication Workers' Union attended a rally at Methodist Central Hall in Westminster.
During the meeting, there was angry criticism of government policy, some calls for the union to sever its links with the Labour Party and claims workers were being "blackmailed" by linking the pension deficit issue to the part privatisation.
The government has proposed taking over responsibility for the pension scheme as part of the proposed sell-off package.
In a letter to Lord Mandelson, Jane Newell - the chair of trustees of Royal Mail's pension scheme - warned its deficit could rise well in excess of its current £5.9bn, should a stake not be sold.
But the Communication Workers' Union said the publication of the letter was an effort to "scare" MPs into voting with the government.
Lord Mandelson: 'The Royal Mail is in danger of running out of money'
Its leader Billy Hayes said it was a "scandal" that the chairman of the pension trustees was "interfering" in politics.
He told Sky News: "The government is saying they want a foreign company to run the post office, which is ridiculous. We could be faced with a situation where the Royal Bank of Scotland is nationalised and the Royal Mail is privatised."
Lord Mandelson defended the letter's publication, saying ministers had to "get a grip" on the pension situation.
Gordon Brown may face the largest backbench rebellion of his premiership on the bill and may have to rely on Conservative and Liberal Democrat votes to get it through.
Labour backbencher John Grogan said three cabinet ministers had told him they opposed the plan and told the BBC:
"Is this the time for the Labour government, which is going through hard times at the moment, to completely split the Parliamentary party down the middle?
"Over 100 Labour MPs have signed a motion against these proposals - it's going to be Peter Mandelson against a big bulk of the Parliamentary Labour Party."
Ministers have given themselves a couple of months to try to win the argument with almost 140 rebel Labour MPs
Lord Mandelson said he was sorry for the "political pain" that the proposals were causing in Labour ranks but vowed not to "walk away" from the plans.
SNP postal affairs spokesman Mike Weir said Lord Mandelson was on a "collision course" with his own party adding.
The government says the Royal Mail needs new investment in technology to survive.
Chief executive Adam Crozier told the Commons business and enterprise committee on Tuesday they were facing "rapidly declining" volumes of letters posted - with an 8% drop predicted next year.
When the pension deficit was revalued, it was expected to reach between £8bn and £9bn, he said.
He added: "The simple fact is the business doesn't generate enough cash to fund the investment required to modernise the business and ensure the future of the USO (universal service obligation)."
Ministers say the plan is not a sell-off but a "partnership" which maintains Labour's manifesto commitment to keep the Royal Mail in public ownership.
So far 145 MPs have signed a Commons motion opposing the move - 125 of them Labour.
Union boss on sell-off 'scare'
Tory MP Daniel Kawczynski told the BBC he would vote against the plan, because he was concerned deliveries to rural areas, like his Shropshire constituency, could be under threatened.
But shadow business secretary Ken Clarke, a former postal minister who failed to persuade Margaret Thatcher to privatise the service when she was prime minister, said most Conservatives would vote with the government.
He urged Lord Mandelson not to "cave in" and said matters had got worse over the past decade and Royal Mail now faced a "serious financial crisis".
"We have the interests of the postal service and public in mind and we will vote in line with the policy of part privatisation," he said.
Unions argue the Royal Mail made a healthy profit in 2008 and can thrive in its current form.
They are worried about possible job losses and the impact of the private sector involvement on the universal service.
Former cabinet minister Peter Hain told BBC Radio 4's Today programme he was worried the plan could "open the door to full-scale privatisation in the future".
Dutch postal operator TNT is the only firm, so far, to have publicly expressed interest in buying a chunk of Royal Mail.
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