The Government sparked fresh controversy today as it promised a massive £3 billion cash injection to help Royal Mail modernise and tackle its pensions deficit - on the same day that the postal organisation reported a surge in profits for last year on record turnover of more than £9 billion.

Alastair Darling, the trade and industry secretary, said the Government would provide a £900 million debt facility that Royal Mail could use to develop and improve its businesses, which include the Post Office and the Parcelforce Worldwide delivery operations.

The DTI also said it would release £850 million of Royal Mail's reserves, which can be ploughed into the pension fund.

"This financing framework will give Royal Mail the right basis from which to take forward an ambitious modernisation programme, helping to deliver a world class service," Mr Darling said.

Allan Leighton, chairman of Royal Mail, told journalists later that the capital boost was worth up to £3 billion, with the Government having promised to pay for huge swathes of the restructuring programme.

Mr Darling added: "Giving Royal Mail the freedom to use its financial resources for the future puts the company in a stronger position to successfully compete in the marketplace and also deliver a financial return for the taxpayer."

Royal Mail now looks set to press ahead with a contentious plan to issue shares to its workers, in what would pave the way for a privatisation that is thought to have the support of the Government.

Privatising Royal Mail would put Mr Leighton and the Labour leadership on a collision course with unions, who claim their members oppose selling off the postal system.

Unions that have campaigned for government investment in Royal Mail welcomed the bailout, claiming that after years of taking money out of the company: "It's payback time."

But the Communication Workers Union (CWU) dismissed the suggestion of a share allocation to workers as part of a planned privatisation as "a stage-managed distraction".

David Ward, deputy general secretary, said: "Our members are concerned about basic pay, pensions and job security, and are not interested in selling out their industry for a phoney one-off payment."

Mr Ward reiterated union concern about potential job losses as a result of the modernisation programme, feared to reach as many as 40,000.

And he added: "On the wider question of investment, it's essential that this package is used to invest not only in technology but to seriously raise the value and status of postal workers' jobs."

The Government loan, which boosts an existing loan of £844 million that will be rolled over, will be provided on commercial terms, making it harder for critics to label it anti-competitive state aid.

The funding boost comes as Royal Mail battles to plug a deficit in its pension fund that it admitted this morning had widened to £5.6 billion. The group, led by chairman Allan Leighton, has also been desperate for money to improve its business operations now the postal marketplace has been opened up to competition.

But it also came as Royal Mail posted a 17 per cent increase in operating profits to £355 million for the past financial year, on turnover that reached a record £9 billion. Group operating profits were some £53 million higher than last year.

All four of its business areas - Letters, the Post Office, Parcelforce Worldwide, and the European parcels business GLS - improved their financial performance.

Royal Mail's Letters domestic door-to-door delivery business made operating profits of £344 million.

Adam Crozier, the chief executive, said: "Royal Mail faces a challenging future - the need to modernise, securing the future of the Post Office network, increasing the focus on customers and improving service yet further, generating the cash to ensure the pension fund continues to meet its obligations, and all the time bringing people with us."

Today financial results, described as "outstanding" by Royal Mail, sparked a £418 "success" payment to the organisation's staff that will total nearly £100 million.

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