Royal Mail's post bag has shrunk by three million letters a day in the last year, pushing its regulated letters and parcels business into a £200 million loss.

The postal group today revealed the extent of Royal Mail's growing financial crisis which is threatening the viability of the universal service that allows people to post a letter anywhere in the country for one price.

The universal service itself has made an estimated loss for the first time of £100 million. Overall losses in the Royal Mail's regulated business are estimated to have reached £200 million in the year to the end of March 2008, compared with a £29 million loss last year.

At the same time, the network of Post Office branches remains under threat as the organisation revealed that four million fewer people have been visiting a Post Office each week, compared with three years ago.

A spokesman for the Royal Mail said: "The question now has to be asked how are we going to carry on providing this key service that is of fundamental importance to the whole economy."

Royal Mail wants to see regulation reduced to a minimum so that it has the freedom to compete fully in both the postal and wider communications market.

A question mark was placed over the viability of the universal service this week when a Government-commissioned review said that Royal Mail's financial position was so precarious that it could derail its obligation to the universal service.

The next report from the review is due this autumn to go to ministers, who will have to decide if action is needed to step in and safeguard the universal service.

Royal Mail is under fire from increasing competition from private sector mail firms and couriers, as well as email. The postal group delivered 80 million letters a day in the year 2007 to 2008, compared with 83 million letters the previous year. Stamped mail loses on average 6p a letter.

Traditionally business post, including marketing mailings, has subsidised the social post — letters and cards — in the mail. However the business post market has been opened up to full competition and industrial action last summer at Royal Mail convinced many businesses to switch contracts away from Royal Mail.

There is also evidence, Royal Mail says, that customers are downtrading products from first to second class mail — which now has a nine pence price differential — and from more expensive premium mail products to cheaper ones.

Royal Mail said that 2007 had been a year of tough challenges and achievements, including a groundbreaking agreement, struck last autumn with unions, over changes to the postal operator's prohibitively expensive pension plan.

It said that daunting challenges remained to modernise the letters business and ensure the Post Office branch network was sustainable.

Post Office Limited, the Royal Mail arm that includes branches, recorded an overall loss of £34 million, an improvement on the £108 million it lost last year. The losses were smaller because of a £150 million payment by the Government to support loss-making Post Offices.

Taking out this payment, the trend in Post Office revenue is downwards. There was less income from traditional services, which have been hit by the ending of certain services. TV licences are no longer sold by the Post Office and increasingly motorists are renewing their car tax online rather than at a Post Office counter.

Royal Mail's revenue increased by 2.3 per cent to £9.3 billion, but group operating profit before exceptionals plunged 30.4 per cent to £162 million. After exceptionals, including restructuring costs and payments into a new share incentive scheme for staff, Royal Mail made an operating loss of £279 million.

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