The European Commission has referred Ireland to the European Court of Justice because of the Government's decision to extend An Post's contract for providing social welfare payment services.

The Commission argues the Government did not give other companies a proper opportunity to bid for the contract, breaching EU law on the awarding of public contracts.

The Commission complained to the Government in a "reasoned opinion" last December but did not receive an adequate explanation of the extension of An Post's contract.

In a statement yesterday, the Commission claimed that the Government should have advertised the contract internationally to ensure that potential competitors to An Post were aware of it.

"The precise scope and form of the advertising required depends on the nature of the services in question and the extent to which the contract is of interest to purely regional, national or EU-wide potential providers of the service. The contract to An Post, for example, amounts to around €40 million and could have interested a number of suppliers outside Ireland. Advertising would, therefore, have to be more than simply national," it said.

Last night, the Minister for Social and Family Affairs, Ms Coughlan, said she intended to "fully contest" the case.

"I believe the European Commission is wrong in its opinion," she said. "I have already taken legal advice on this issue, and intend to continue to support our network of post offices."

She added that it would not affect welfare payments made through the post office network.