The Post Office is in talks with the Bank of Ireland to offer a current account that would give customers an unlimited guarantee on deposits.

Ministers are under pressure to use the Post Office to create a public sector “people’s bank” that will provide basic financial services to those who most need them.

Royal Mail, which runs the Post Office, is understood to be in discussions with the Bank of Ireland, which already runs a number of its existing financial services.

The accounts look set to have an unlimited guarantee because the Irish Government has offered to underwrite all deposits in Irish banks.

Sources suggested that had the partnership been with a British bank, it would have been subject to the existing £50,000 guarantee.

The terms of the account, and whether it would offer more favourable terms than high street competitors, are yet to be decided.

The Post Office already has 1.8 million customers who use its financial services, including savings accounts, foreign currency and credit cards.Ministers are desperate to increase the use of Post Offices to prevent them from closing, particularly during the down-turn.

This comes the week after James Purnell, the Work and Pensions Secretary, announced that the Post Office would retain its £1 billion, five-year contract to distribute benefits to 4.3 million claimants.

On Monday, a report by Postcomm, the postal services regulator, called on Royal Mail Group and the Post Office to be run as separate businesses.

Peter Luff, the Tory chairman of the Business Select Committee, welcomed the banking move. He said: “This is very significant and very welcome indeed. It is exactly the kind of thing the management of Post Office Limited can do now the Government has ended the uncertainty over the Post Office Card Account. By developing a proper banking service Post Office Limited can both build a truly sustainable business and maintain vital services to remote and deprived communities.”

MPs of all parties have fought against the decline of the Post Office, particularly in rural areas, and some within the Labour party want the Post Office to offer an alternative to high street banks.

Jon Cruddas, the Labour MP, who has close links to the unions, said that ministers needed to help to create a “people’s bank”.

He said: “We need to go further in future – there are over two million people unable to get a bank account and they are going to increasingly feel the pinch from the credit crunch, extortionate credit card rates and rising bills.

“We need the Post Office to become the People’s Bank and the card account to become a real alternative to a bank account. That will not only help to secure the Post Office as a vital public service but also open up basic financial services to those who most need them. We need to show some real joined-up thinking.”

There have been signs of ministerial backing in recent days, with Lord Mandelson, the Business Secretary, throwing his weight behind the move.

He said in a letter to the Prime Minister: “We should examine the prospects for POL [Post Office Ltd] becoming a much more significant player in financial services – offering a wider range of attractive products within easy reach of the whole population, available from an institution they can trust.”

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