The letters business recorded a loss of £3m because of a sharp decline in mail volumes as well as the impact of competition in the postal industry. It was the first loss of its kind for a number of years.

The universal postal service under which letters are delivered anywhere in the UK for the same price lost £100m, according to the figures for the 2007/8 financial year.

The overall price controlled area of Royal Mail's business lost around £200m.

The group's revenues increased over the year by 2.3 per cent to £9.4bn largely because of a rise in the parcels business.

The figures also revealed that the Post Office network is losing around £500,000 a day.

Overall operating profits were down 30.4 per cent.

The financial results were published just days after an independent review reported that competition had not delivered positive results for consumers and smaller firms.

Adam Crozier, the Royal Mail's chief executive, said: "The £162m operating profit is a robust financial performance, ahead of expectations, in a year when we faced many difficult challenges.

"But we secured a landmark agreement on modernisation and pensions and are pressing ahead with the vital investment in and modernisation of Royal Mail letters to ensure it competes successfully in a market where volumes are falling and competitive pressures are increasing,"

The Royal Mail said its results were dominated by the profit fall in its letters business where market volumes have declined by 3.2 per cent over the past year.

The Royal Mail is handling three million fewer letters a day than a year ago and revenues have fallen further as more people use second-class rather than first-class mail.

Mr Crozier said there had been strong revenue growth in the group's parcels businesses.

He added that the company was more than half way through implementing the Government's decision to close 2,500 post offices, adding: "We continue to do all we can to implement the programme as sensitively as possible and at the same time we are launching new products and services to earn as much revenue as possible for the post office and to keep branches open as income from traditional business declines."

Allan Leighton, the Royal Mail's chairman, said: "Overall, this has been a year when we did not shirk difficult challenges and decisions and when we began taking the crucial next steps to put the company in a stronger position to tackle the tough market conditions we face.

"Our financial performance would not have been possible but for our determination to drive greater efficiency across the business and to develop services that meet the needs of our customers who today have real choices, both within the postal industry and the wider communications market".

The Royal Mail paid £800m into the company's pension scheme described by Mr Crozier as a "huge" sum.

The company is preparing to make a submission to an independent review of the postal market on how the universal service can be maintained in an increasingly competitive market.

Mr Crozier said the service was part of the fabric of the UK's society but he warned: "It is now in the red for the first time, so it is vital that we have the opportunity for a real debate about how the universal service should be financed and sustained going forward".

Consumer group Postwatch voiced concern that the universal service had moved from profit to loss.

But the group welcomed comments by Mr Crozier that the service was a huge asset to the Royal Mail as well as important to the UK economy.

"Customers will be reassured to read that Royal Mail's vision for the future includes providing a high quality, efficient and profitable universal service." Shadow minister for postal affairs Charles Hendry said: "These dire figures are evidence of a structural decline in the Royal Mail, not a short-term problem.

"Royal Mail desperately needs to drive down their costs if they are going to continue to compete in the 21st century.

"This is a crisis for the Royal Mail and a major problem for the Government. It is right that they have set up a review to look into this but it desperately needs to be accelerated – reporting in the autumn will only prolong this problem."