MPs have warned the government that postal deregulation should not allow Consignia to cut back on delivery services.

With the troubled company warning of mounting losses and piloting a scheme to give priority to business deliveries, MPs piled the pressure on postal service regulator Postcomm to think again on its plans to increase competition in the sector.

And the government urged Postcomm and Consignia to seek "reconciliation" on plans to liberalise the sector.

Postcomm has proposed that beginning in April this year competition should be introduced for bulk mailings containing a minimum of 4000 items, with the aim of full liberalisation by March 2006.

The regulator says that its plans will both promote competition and maintain services throughout Britain, given that "universal service is a commercial imperative as well as a social necessity".

But Consignia has warned that up to £2 billion of its revenue would be up for grabs under the Postcomm proposals, a cost it says is unaffordable as it is already losing more than £1 million a day.

Consignia has warned that it faces "death by a thousand cuts" as competitors "cherry pick" the most profitable service areas, leaving it to undertake costly deliveries to more rural areas.

Faced with mounting loses, Consignia is also piloting plans to drop the second daily delivery and replace it with a single delivery to businesses between 7.00am and 9.00am while urban households should receive mail between 9.00am and 1.00pm and rural areas would receive post by late lunchtime.

During the Westminster Hall debate, MPs from all sides lambasted both the plans of both Consignia and Postcomm, saying they threatened deliveries to rural areas.

And while ministers have said the decisions on competition will be made by the regulator, MPs told the government that it should force a rethink on the proposals.

Lindsay Hoyle, the Labour MP for Chorley, said the Postcomm proposals were a "major threat" to universal deliveries.

"What we are saying is that we are opening up the most profitable part of the postal service at the expense of the least profitable service," he said. "Now I would have thought logic should apply to Postcomm that you at least have a balance."

"If we are not careful Postcomm could turn this great public service into another Railtrack," Hoyle added.

Former Labour minister Gavin Strang said his experience had been of an "excellent service" but he warned that cutbacks to deliveries would undermine claims that the government was improving public services.

"There is no substitute for a decent delivery of the Royal Mail...we can't argue we are delivering better public services if we reduce the delivery," he said.

Strang added that the regulator's proposals would undermine the provision of a universal service. "My goodness, I hope we're not going to go down the road proposed by Postcomm," he said.

Liberal Democrat MP for West Aberdeenshire and Kincardine, Sir Robert Smith, said his rural constituents were worried by the "terrifying" proposals and the "threat to reduce the service to our constituents" if competition undermined universal deliveries.

Michael Weir, the SNP member for Angus, said blame should be more widely shared. "Consignia are no angels in this matter since they themselves have looked at ways of cutting back on delivery. After Railtrack, we could now be faced with a 'mailtrack'," he warned.

Conservative frontbench spokesman on trade and industry, Nigel Waterson, rejected the criticism of plans to increase competition, saying they were "designed to improve the service to consumers".

Consignia had "failed miserably" to meet delivery targets, said Waterson, and were "simply in a mess". And unions were also to blame for some of the problems.

"I believe the proposals of Postcomm need serious consideration...but what ever happens, it must be done quickly or there will be no Consignia for us to debate," he said.

The Liberal Democrat trade and industry spokesman, Vincent Cable, also drew comparisons between the fate of the railways and the plans for postal services.

Both depended in a single network that competition could not duplicate, so fewer Royal Mail deliveries would lead to rising unit delivery costs and bigger financial losses.

"The more that cherry picking is allowed, the danger is that rather than cutting costs, it pushes them up," said Cable.

Closing the debate for the government, trade and industry minister Douglas Alexander said the Post Office had been "deprived of investment" under the Conservatives, while Labour had allowed the company greater freedom under the Postal Services Act 2000.

He told MPs that "no decision" had been taken on whether the government would take a dividend from Consignia for 2001.

Offering some reassurance to MPs, he said the legislation required the regulator to maintain universal deliveries as a "primary" obligation.

And he called for an end to the dispute between the regulator and Consignia bosses. "We urge Consignia and Postcomm to see if there can be a reconciliation reached," he said.