GORDON BROWN was preparing for a third embarrassing climbdown last night as the government signalled full-scale retreat over plans to privatise the Royal Mail.

Following last week’s defeats over the Gurkhas and MPs’ expenses, allies of the prime minister said that the controversial scheme to sell off part of the postal service would be “kicked into the very long grass”.

Labour whips have told the prime minister that, with his authority badly damaged, a Commons defeat over the Royal Mail would be “inevitable” if he put it to the vote.

The decision will infuriate Lord Mandelson, the business secretary, who has claimed his proposals would bring a “gale force of fresh air” into the loss-making postal service.

Yesterday, Pat McFadden, the post office minister and Mandelson’s deputy, insisted privatisation was still on track. The business secretary has drawn up a compromise “John Lewis plan” which would see the Royal Mail turned into a partnership part-owned by its workers, like the store chain.

However, a source close to Brown said: “Maybe a month ago this sort of plan might have worked, but the middle ground has fallen away. The rebellion is too strong and entrenched. We cannot afford to be left in a position where we are relying on Tory support.”

Around 150 Labour MPs have signed a Commons motion condemning the plan to sell up to 30% of the Royal Mail to a foreign rival such as Dutch-owned TNT.

The government had planned to put the proposals to a vote after the June 4 European elections. Sources close to Brown believe that a full debate is now unlikely until after the party conferences in October.

With the prime minister facing heavy criticism over his clumsy leadership style, Labour MPs warned that he could face a formal challenge if the party slides into third place in next month’s European elections.

Leftwinger Alan Simpson said: “Everything will be determined over the summer. Already I come across significant numbers of Labour MPs whose views are that they must try to save themselves.

“If we go into the summer on a continuing tailspin it won’t be long before someone says that the only prospect of limiting defeat is to go for the sympathy vote by having someone different from Gordon leading the party.”

While most MPs say the prospects of a leadership challenge have receded since last year, a large minority believe that a “stop the rot” caretaker leader might be necessary.

Alan Johnson, the health secretary, is seen as the most likely successor. Yesterday, in an interview, Johnson described himself as an “admirer” of Brown but he refused to give a direct answer when asked if he could be “persuaded to be the saviour of the party”.

One MP who voted against the government over the Gurkhas last week said: “Gordon is like a suicide bomber who seems intent on blowing himself up as he puts his arms around us.”

Senior Labour figures have privately called for the return of one or more “big beasts” who can offer Brown better strategic advice and help him avoid the pitfalls of the past week. David Blunkett and John Reid, the former home secretaries, have both been tipped for comebacks.

According to one minister who is a confidant of the prime minister, Brown’s judgment has been impaired by sleep deprivation: “He is trapped in this Calvinist vicious cycle where the worse his position, the harder he works and the less he sleeps; and, of course, the less he sleeps the worse his judgment becomes.”

John Prescott, the former deputy prime minister, yesterday led the loyalist fight-back with highly personal attacks on Labour MPs who have criticised Brown.

Prescott challenged Charles Clarke, the former home secretary who last week said recent events had made him “ashamed” to be a Labour MP, to leave the party.

“Charles, if you are ashamed to be in the party, it’s obvious what you should do,” he said.

Prescott suggested Blunkett, who had said Brown lacked “political antennae”, was more interested in watching football than fighting for the party.

“I asked David if he’d come out campaigning and he said he couldn’t because he was going to a football match. Fine, but then \ goes and makes a speech in Doncaster, attacking [Brown].

“What I am saying is, let’s have the debate among ourselves. David, come and join me on the campaign, for God’s sake.”

Jack Straw, the justice secretary, in a speech to his local Blackburn party, called for an end to Labour defeatism.

“We all need to focus on what brought us into politics, not get dragged into narrow arguments which risk the charge that we are out of touch,” he said.

“Every minute people spend talking down our chances of winning the next election is a moment they could be spending working to win the next election.”

Meanwhile, Labour whips are growing increasingly anxious about the possibility of another parliamentary defeat by peers this week.

They fear the Lords will throw out government plans to ban the display of cigarettes in shops amid fears that it could have a serious impact on small businesses.

Times Recommends

• Secret files show Thatcher's role in coup plot
• Veterans to boycott Shell after ban on poppy sales
• 'I survived so please let Baby RB live too'