A levy on An Post to cover the cost of regulation is set to be slashed following talks between the two sides.

A consultation paper issued last night by the Office of the Director of Telecommunications Regulation, which monitors An Post, suggests a levy for the year to June 2003 of €1.1 million, less than half the €2.5 million envisaged when the issue was first raised last year.

An Post last week dropped a High Court challenge to the original levy imposed by the regulator. An Post had claimed in the action that it should not pay a levy and was not required under European directives to fund the regulator.

It also complained that it had not been given a breakdown of the costs incurred in any such regulation of the service. It claimed the cost of regulation would lead to a loss on its universal service obligation.

A spokesman for An Post would not comment on the matter last night beyond confirming that the High Court action had been dropped. The latest consultation paper issued by the regulator Ms Etain Doyle attributes the reduced proposed levy to the sharply lower cost of putting in place the contract to monitor the quality of An Post's service. It had been estimated at €1.3 million a year but this has now fallen to €250,000.

The paper also suggests that the levy in future years be set at a quarter of 1 per cent of relevant turnover. This compares with a figure of around half of 1 per cent levied on telecoms groups, which also come under the aegis of Ms Doyle.

The regulator is responsible for monitoring the quality of the postal service, the price of the service to customers, accounting procedures and intra-EU cross-border mail services.

The regulator is looking for comments on the proposals before November 20th and hopes to confirm the level of the levy before year end. An Post has been struggling to secure its financial future in the face of mounting losses in in post office network and increased regulation on competition from Europe.