Postal workers were tonight braced for a bitter battle with the Government after it decided to press ahead with controversial privatisation plans.
The decision came after a report warned that "urgent action" was needed to protect the Royal Mail.
Controversy over ownership of the Royal Mail erupted when an updated version of a study - originally ordered by the Labour government - called for private investment.
Richard Hooper said the Royal Mail's financial position had worsened since his earlier report, warning that the group's £10 billion pension deficit was more unsustainable.
He called for an injection of private capital into the business, arguing that it would fund increased modernisation of the postal service.
Business Secretary Vince Cable said the report painted a "very clear picture" of the way forward as he announced that legislation will be unveiled in the autumn.
The Communication Workers Union (CWU) described privatisation as "old politics" and voiced fears that the Government was plotting to "seize" pension assets it said were worth £26 billion.
The union, which held a series of strikes last year in a row over modernisation, has not ruled out fresh industrial action as it mounts another campaign to keep the Royal Mail wholly publicly owned.
Mr Hooper said that since his last report in December 2008, underlying issues which threatened the universal postal service - the same price goes anywhere and a collection and delivery of letters six days a week - remained, so that urgent action had to be taken.
His report said the decline in the number of letters being sent was greater than forecast in the 2008 report and would continue to deepen, with worldwide falls in the next five years of between 25% and 40% likely.
The continued growth in parcels, a result of internet shopping, will not make up for the decline, he warned.
Despite important steps forward on modernisation, Royal Mail still lagged well behind the leading postal operators, according to the report.
:: A new, less burdensome regulatory framework, with responsibility for regulation moving from Postcomm to Ofcom;
:: The pension deficit should be taken over by the Government as part of the wider range of measures;
:: Private sector capital must be introduced into Royal Mail in the form of sale to a partner/trade investor or offering shares.
Mr Hooper argued that access to private capital would ensure that cash was available to fund modernisation, adding that the state of the public finances meant that Royal Mail will find it even harder to compete for Government capital against other public spending priorities.
Private funds would also inject private sector disciplines into the business and reduce the risk of political intervention in commercial decisions, said the report.
Mr Hooper said: "If all the recommendations in my updated report are implemented without further delay, and Royal Mail modernises to best in class, with management, workforce and unions working together, then, despite the very real market difficulties, the company has a healthy future.
"Building on its unique ability to visit 28 million addresses on a daily basis, it can aspire to be the delivery company of choice for a wide range of physical mail from letters to parcels."
Mr Cable said: "This update reaffirms the findings of Richard Hooper's original report and the views he has given me during the course of the summer. He paints a very clear picture - Royal Mail is facing a combination of potentially lethal challenges - falling mail volumes, low investment, not enough efficiency and a dire pension position.
"We are determined to safeguard Royal Mail for the future and help it tackle these challenges. We will come forward with new legislation in the autumn. It will draw heavily on Hooper's analysis and recommendations and the Government's wider objectives, including the need for employees to have a real stake in the future of the business."
A Postal Services Bill will be introduced during this session of Parliament, probably next month.
CWU general secretary Billy Hayes said: "Privatisation is old politics. It's the failed politics of history which brought disruption to Britain's utilities and railways and astronomical prices for consumers. Dangerously in this case, we fear the Government may also be plotting to seize the pension assets.
"Privatisation would be devastating for Royal Mail and the whole country's postal services. The universal service has been a key part of the UK post for 170 years but because it isn't the profitable element of mail, the privatisation will put it at risk.
"This could damage the service for all customers, including millions of small business and potentially harm the UK economy. Privatisation will also mean separation of Royal Mail and the post office network, putting the very existence of many more post offices that play such a key role in Britain's communities at risk.
"Royal Mail has always been a privatisation too far and there is a public majority out there who will vote this Government out for flogging off our national assets and breaking our public services."
A Royal Mail spokesman said: "While we're getting on with modernising the company as fast as our capital permits, the report clearly demonstrates that to keep delivering the universal service, Royal Mail needs a way of getting access to capital, a resolution of the legacy £10.3 billion pension deficit and a strikingly different regulatory approach which allows us to compete fairly in an increasingly tough and shrinking market."
The National Federation of SubPostmasters urged the Government to provide more information on its plans for the national network of post offices.
General Secretary George Thomson said: "The proposed separation of Royal Mail's retail arm from the mail company is a highly unusual step, without precedent anywhere else in the world.
"We therefore need to be certain that our treasured network of post offices, which provide vital services to communities and small business across the UK, will not in any way be jeopardised as a result of these proposals."
Robert Hammond, of Consumer Focus, said: "Richard Hooper rightly identifies the need for change within Royal Mail to go further and faster.
"The primary concern is that the postal service meets the needs of consumers today and in the future. It is vital that the universal service obligation is maintained."
Labour leadership candidate Ed Balls said: "I believe we should keep the Royal Mail in the public sector and providing a universal service, as Labour promised in our manifesto and as the majority of the public support."Reuse content