Around 2,500 post offices will be forced to close, MPs were told today.
However, the government is attempting to head off any extra closures after it abandoned plans to withdraw the post office card account - a crucial source of revenue for post offices.
Announcing the plans in the Commons, the trade and industry secretary, Alistair Darling, said there was widespread recognition that operating the existing network of 14,263 offices was "unsustainable".
Mr Darling said the network had to be restructured to reflect the dip in business and losses of £4m a week - twice as high as last year.
He also announced plans to set up 500 "innovative" outlets for small, remote communities, including mobile post offices and services offered in village halls, community centres and pubs.
Mr Darling told MPs the government had abandoned its plans to withdraw the post office card account in 2010. He said the contract would instead be re-tendered and the post office network would be "well placed" to win it.
The number of closures announced today was less than some had feared, and the trade and industry secretary has attempted to minimise the losses by earmarking £1.7bn over five years to prop up the network.
The move came after widespread opposition to the prospect of closures, with a petition containing 4m signatures presented to the prime minister in October.
"The post office provides an important social and economic role, particularly for our rural communities and deprived urban areas," Mr Darling said.
"Post offices face a long-term challenge. Internet, email and text messaging have meant that people, young and old alike, increasingly use the phone or internet banking, cashpoint machines or direct debits to pay their bills.
"People are increasingly choosing to access services in different ways, resulting in some four million fewer people using their post office each week than two years ago."
The government also published new access requirements for post offices, which say 90% of the population should be within one mile of a branch. In rural areas, 95% of the population should be within three miles, with that distance doubling to six miles in remote areas.
The Department of Trade and Industry said 800 of the smallest rural post offices served only 16 people a week at a cost to the taxpayer of £17 per visit.
The closures are expected to begin coming into effect next summer and will continue for 18 months, reducing the size of the network to around 11,760 officers. Subpostmasters of offices forced to closed will get 28-month compensation package.
"This will bring fear and anxiety to people, often the most vulnerable, in every part of the country," the shadow post offices minister, Charles Hendry, said.
"It will destroy many good businesses, simply because the government does not have a long-term vision for the future of the post office network.
"The government needs to recognise that, if the local post office closes, often the last shop in the village closes as well ... a van for a couple of hours a week is no replacement for a post office open full time."
Millie Banerjee, who chairs the consumer group Postwatch, said the focus "should be on ensuring customers have access to post office services".
"We are pleased to see the government recognises the social and economic role of the post office network, but are disappointed that there is no further information on how the social role will be taken into account when considering a post office's future," she added.
The National Federation of Sub-postmasters said the plans were a welcome first step to arrest the decline of the network.
However, the organisation remained unconvinced that the announcement would draw a line under difficulties faced by post offices and bring about the goal of a sustainable national network.
"The package announced by the government today goes some way to creating the conditions which can, over time, create a viable network," the general secretary, Colin Baker, said.
"We bitterly regret the need to accept that some post offices will close, and it is a sad indictment that a programme of closures is better than the slow death of the entire network."