Thousands of post offices threatened with closure were thrown a lifeline yesterday as the Government said that they would still be used to distribute benefits and pensions to 4.3 million people.

In the first of a series of moves to revive the Post Office, ministers abandoned a plan to hand the running of its card account to a private company.

The move, driven by James Purnell, the Work and Pensions Secretary, Pat McFadden, the Business Minister, and Lord Mandelson, the Business Secretary, came after a nationwide campaign to save the branches, involving hundreds of Labour MPs.

In a letter to Gordon Brown, Lord Mandelson wrote recently of the “reassuring” nature of the Post Office during troubled economic times.

The Post Office had faced competition to run the account from Pay-Point. That company and others were suddenly told that the bidding process was over. They will be paid compensation for their costs.

Mr Purnell told MPs that the Post Office would retain the business under a new contract running for five years from 2010, with the possibility of an extension.

About 2,500 post offices will have shut by the end of the year and there had been warnings that a further 6,000 could have been threatened if the card account had gone elsewhere.

Lord Mandelson and Mr McFadden are also considering letting the network provide other government services and financial products. They believe that as a trusted brand the Post Office could offer services run by institutions whose reputations have suffered in the credit crunch.

Mr Purnell said that the tendering process had been cancelled to ensure that the network remained viable.

“Global economic events have made people, particularly the most vulnerable in our society, more concerned about financial transactions,” he said.

“The Post Office is seen as a safe, secure and reliable provider of services in these turbulent times. Now is not the time for the Government to do anything to put the network at risk, particularly as post offices are often the only providers of financial services in remote areas.”

About £80 million is paid out every day to holders of the Post Office Card Account, with many spending some of that money in post offices or shops run by sub-postmasters.

Billy Hayes, general secretary of the Communication Workers Union, said that the announcement was “a victory for common sense”.

George Thomson, general secretary of the National Federation of SubPost-masters, said: “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.”

Alan Duncan, the Shadow Business Secretary, said: “This process has been a humiliation for the Government and a deeply destabilising waste of time for everyone else.”

Mark Harper, the Conservatives’ Work and Pensions spokesman, asked Mr Purnell to reveal the cost to the taxpayer of the failed tender exercise.

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