Introducing further competition in postal services could threaten universal services, the government's financial watchdog has warned.

In its report "Opening the post", the National Audit Office said there were "serious risks" involved in extending postal competition.

The report concludes that Postcomm, the new postal regulator, had made a good start in opening up the market since its creation in March 2001. But it warns that there could be insufficient competition to generate an improved service to most customers.

The report says that "the introduction of competition could result in a breakdown in the delivery of a universal service at a reasonable uniform price".

The NAO said that Consignia provides an extensive service which is relatively cheap and well regarded but finds that it has rarely met its delivery targets in recent years.

It also points to deteriorating profitability and serious industrial relations problems within the firm.

"Until there is effective competition, Postcomm will need to regulate Consignia's prices and quality of service directly," it said.

Sir John Bourn, head of the National Audit Office, said Postcomm had taken some important steps.

"But for their strategy to be successful, and to ensure that postal services improve rather than decline they need to address the risks I have identified," he said.

Postcomm welcomed the report - saying it contained a "clear description of the complex challenges which we face, the risks inherent in the introduction of competition into postal services and the way in which we are addressing those challenges and risks".

Consignia said the report was a "detailed and wide-ranging" analysis of the postal market.

"The report makes clear, however, that there are major risks for Consignia in the approach Postcomm is developing. In particular, Consignia's ability to provide a universal postal service...could be in jeopardy because of cream-skimming of profitable sectors of the mail market by companies given a licence by Postcomm," said a Consignia spokesman.

"Consignia recognises that a tough market will inevitably get even tougher in future. That is why the company is pressing ahead with its plans to reduce its costs by 15 per cent to sharpen its competitiveness and ensure its services meet the needs of customers."

The Liberal Democrats said Consignia was now accepting arguments it had previously rejected.

"The warnings given by Sir John Bourn mirror the concerns that my colleagues and I expressed a month ago, for which we were widely condemned by Consignia," said the party's trade and industry spokesman, Dr Vince Cable.

"The unthinking introduction of more competition into the post office, already beset by competitive pressures from email, fax and mounting losses, will undermine its ability to provide universal service," he added.

"It is very clear that the government's present approach to the Post Office cannot continue," said Cable.

"Allowing the regulator, Postcomm, and the European Commission to strip out profitable parts of the business and hand them over to competitors is absolutely the wrong way to introduce competition."