An Post has been given the go-ahead by the Government to enter negotiations with other European operators to form a strategic alliance. It will also begin talks on an employee share option scheme (ESOP), for up to 14.9 per cent of the company.

Industry sources say the field is an extremely narrow one - with just three or four major players in the frame. These include Royal Mail, owned by the British Post Office, Dutch Post, formerly part of KPN, which is exiting from Eircom, and German company Deutsche Post.

At this stage, it is unclear what level of equity such a partner would bring, and sources said the process could take up to 12 months to complete.

An Post said last night that it had engaged in "preliminary discussions with a number of European postal operators regarding the best way forward for An Post". The move is being driven by continued liberalisation of the European market.

Public Enterprise Minister Ms O'Rourke said the Government had noted the major changes facing An Post and the need for the company to engage in a radical transformation process. "Competition, consolidation in the postal market and new technology are driving change at a rapid pace across the EU," she said. Industry sources say the global mail market "is a hotbed of activity" and "everyone is talking to everyone". They say Deutsche Post and Dutch Post have been particularly acquisitive over the past 12 months.

"It is difficult to envisage An Post, given its scale, having the critical mass to compete globally in the next couple of years," said a source. "It is vulnerable to a take-over, unless it finds a strong partner."

Some countries - such as Finland - are more fully liberalised than other European countries. Earlier this year, the Republic's letter market was liberalised, albeit by the minimum permitted under the first European Postal Directive. This exposes £20 million of previously reserved annual revenues to competition, according to An Post.

Talks between management and employees about restructuring the company have been taking place for some time. It is understood restructuring will include some redundancies among the 8,500 staff.

An Post's pre-tax profits plunged to £8.3 million, down 40 per cent on last year. The company blamed rising costs and increased competition. On a more positive note, it sold PostGem/Ireland Online for £115 million (€146 million) last month.

The company has also been asked by the Government to spend £5 million upgrading its sub-post offices, of which there are about 1,000.