Royal Mail, the UK state-owned postal operator, has warned it could be forced into bankruptcy by its £4.25bn ($7.3bn, €6.2bn) pensions deficit, which it said on Thursday would increase by up to £2bn when new mortality assumptions – postmen living longer – were fed into the balance sheet in March.

The prediction of potential doom comes six weeks before the UK postal services market is opened up to full competition – a move seen as a test for the full liberalisation planned for other European Union markets this decade.

Royal Mail is locked into a ferocious battle with Postcomm, its regulator, over price controls for 2006-10, which are due to be finalised at the end of this month. The postal operator argues the initial controls proposed by Postcomm would send it into a “spiral of decline”, allowing overseas rivals to cherry pick the most profitable parts of its business – such as junk mail – while forcing it to deliver domestic letters at uneconomic prices. The regulator has retaliated by accusing the group of exaggerating the threat from competition.

Half-year results unveiled on Thursday would appear to favour the regulator’s case. Royal Mail announced a 20.5 per cent increase to £159m in operating profits for the six months to September 30, helped by a strong performance from General Logistics Systems, its European parcels business.

However, mail volumes in the UK fell more than 1 per cent, triggering a 3 per cent reduction in the half-year operating profit at the flagship Royal Mail letters division.

Allan Leighton, chairman, said the group’s seemingly overall healthy financial state belied the looming triple threat to the business from its regulator, increasing competition and pensions liabilities. Mr Leighton warned that Royal Mail would have to pay £900m a year towards pensions – compared to operating cash flow of about £600m – if the mortality changes added £2bn to the deficit and the pensions regulator insisted the deficit repayment period was halved from 20 to 10 years.

Asked if Royal Mail could be bankrupted by this, Mr Leighton said: “Of course it could. If you run out of cash, you’re dead.”

Royal Mail is lobbying for a cash investment of at least £2bn from the government, its sole shareholder, but complained that it was caught in the middle of a “bat and ball game” between ministers and Postcomm over who should pick up the tab for the pensions deficit.