The decision was greeted with a mixture of delight and relief by postmasters, MPs and campaigners who feared that 3,000 more branches, including hundreds in Yorkshire, would have been forced out of business if the company was stripped of the Post Office Card Account contract.

The account is vital to the Post Office because it directly generates income and also brings more customers into branches. It is used by pensioners and benefits claimants to collect their money if they do not have bank accounts, and 406,990 people use the service in Yorkshire and the Humber.

Work and Pensions Secretary James Purnell said he was cancelling the tendering process – in which PayPoint and another company were competing with Post Office Ltd to run the account from 2010 – to avoid putting the network at risk in the current economic climate.

Mr Purnell said maintaining a viable post office network was "even more critical now than it was two years ago", when the contract was put out to tender, and said people saw the Post Office as a trusted brand and a "safe, secure and reliable" provider of services.

The decision – at a time when 2,500 post offices branches across the country, including dozens in Yorkshire are being closed to stem losses – will be welcomed by campaigners who had feared that PayPoint was about to win the contract. A total of 265 MPs, more than 100 of them Labour, had called for the contract to be given to the Post Office.

Mr Purnell's remarks also suggest the Government has finally acknowledged the special place post offices have in the hearts of many people and the community role they play, particularly in rural areas. Ministers still faced calls to go further and open up more business opportunities for branches to secure their long- term future.

Mr Purnell said the Post Office would now run the card account until 2015, with a further extension possible. The other bidding companies will be compensated for their expenses.

The Minister said: "The Post Office, with its trusted brand, is seen as a safe, secure and reliable provider of services. I believe that now cannot be the time for the Government to do anything that would put the network at risk, particularly as post offices are often the only providers of banking services in both rural and deprived urban areas."

Tory Shadow Business Secretary Alan Duncan said the decision "marks a great success for those who have campaigned for the Post Office and a humiliating climbdown for the Government which has done everything it possibly can to find a way of awarding it to someone else", while the Liberal Democrats said Ministers had listened to "vociferous opposition".

Leeds North West Liberal Democrat MP Greg Mulholland heralded the decision as "momentous", while Keighley's Labour MP Ann Cryer said constituents would be pleased.

Beverley and Holderness Tory MP Graham Stuart said: "The loss of the account would have dealt a terrible blow to the surviving network of post office branches and led to another round of damaging closures.

"I know many of my constituents access their benefits each week at the local post office and I have had around 900 residents writing to me to express their concerns."

The general secretary of the National Federation of Sub-postmasters, George Thomson, said the Post Office offered customers "unrivalled geographical coverage, security and peace of mind, and a seamless transition from the current card account".

But he warned: "This decision must now mark an end to continued uncertainty surrounding the post office network's future.

"We cannot sustain the ongoing threats to vital services and further post office closures every two or three years.

"Instead, the Government will hopefully now start to make full use of the huge national asset it has in the Post Office, rather than regarding it as a problem and continuing a downward spiral of cuts and closures."

The managing director of the Post Office, Alan Cook, said: "We very much welcome this decision, which enables us to achieve our goal of maintaining a branch network of around 11,500 outlets for the foreseeable future."