The Post Office is threatening to raise stamp prices and cut more jobs after the Government demanded that the organisation almost double the amount of money it returns to the Treasury.
Mike Heron, the Post Office chairman, said he had protested "very strongly" to ministers about the new cash-back targets, which would wipe out profits and leave little to re-invest in services.
It was revealed in the fine print of Tuesday's Budget that instead of paying pounds 534m in dividends to the Government over the next three years, the Post Office must now pay pounds 925m.
"It makes a rise in postal prices almost inevitable," Mr Heron said. "And we will have to look for pounds 100m in efficiency savings in each of the next three years."
The Government had set an annual dividend from the Post Office at pounds 178m for each of the next three financial years. That had been increased to pounds 298m in 1996/97, and to pounds 317m and pounds 310m in the following two years. The three-year total of almost pounds 1bn is about as much as the Post Office has paid in the last 10 years.
The move sparked a political row, with the Labour Party accusing the Government of milking the Post Office to pay for tax cuts while putting services at risk.
Mr Heron said he was told of the move last week by Ian Lang, Trade and Industry Secretary, who emphasised the need to reduce public borrowing.
Now Mr Heron has written to the minister warning that the Post Office would suffer unless it was given greater commercial freedom to compete more effectively. He has set out a detailed list of demands, but declined to reveal them yesterday.
In 1993 the cost of stamps was frozen until March 1996, but the organisation was now likely to raise first and second-class prices by at least 1p to bring in extra revenues of between pounds 130m and pounds 150m.
The Post Office made record profits last year of pounds 472m. On top of paying Treasury dividends, the Post Office paid pounds 110m in corporation tax.
John Roberts, the chief executive, said: "The Government has its job to do and we have ours. We would be failing in our duty to the customer if we did not make clear the implications of these figures."
He recognised that the taxpayer deserved to share in Post Office profits, but said that the right balance was needed between returning dividends and investing in services. Capital expenditure has been running at between pounds 350m to pounds 400m a year.
Attempts to privatise the Post Office last year were defeated in Parliament and this move suggests that a sell-off is now far down the political agenda.
Michael Heseltine, then trade secretary, had indicated he would try to give the organisation more commercial freedom within government ownership. The fear now is that the increase in government cash demands is a complete reversal of that policy, and the Treasury is intent on using the Post Office as a "piggy bank" to finance tax cuts.
The Post Office has shed about 10,000 jobs in the last four years, and productivity has risen 33 per cent. But Mr Roberts said the increased cash demand would make the organisation increasingly vulnerable to attack from foreign rivals.
Margaret Beckett, shadow trade secretary, said: "The Government are not content with the pounds 35m a day they have taken from North Sea oil and privatisation over the last 16 years. Now they are demanding another pounds 1m a day from the PO."