The fine, the biggest imposed by an industry regulator, will come as a major financial blow to Royal Mail, which is battling to cut costs and stem massive losses.

It comes after the Royal Mail failed to improve two of its pre-paid envelope services, of the type used by photographic labs, after being ordered to do so in December.

The regulator said performance remained 6% below agreed targets for the year for both services.

Strike threat

Royal Mail chief executive Adam Crozier said: "This heavy �7.5m fine further tightens the financial pressure on Royal Mail."

I hope this penalty will drive home to people at all levels in the Royal Mail the message that customer service matters Graham Corbett, Postcomm chairman

He said the decision was a "stark warning" to postal workers set to hold a 24-hour walkout in London tomorrow (Wednesday) in a row over pay in the capital.

"It is unlikely that the regulator will make any allowance for falls in customer service caused by a strike," Mr Crozier said.

He added such action was "madness" and could end up costing the Royal Mail up to �10m in fines.

"Some of the London postcodes areas are among the worst performing in the country. If Royal Mail is to hit its targets... it's vital that service in London improves."

Pay-out plans

Postcomm said that the fine, the first it has imposed, took into account the fact that there is no mechanism, as yet, to directly compensate customers affected by the poor service.

However, the regulator added it will finalise a compensation scheme shortly.

Postcomm chairman Graham Corbett said: "Most businesses lose customers and lose money when they provide poor service.

"I hope this penalty will drive home to people at all levels in the Royal Mail the message that customer service matters."

The fines relate to two services: First Class Post Paid Impression (PPI) and First Class Response Services.

In December, the Royal Mail was issued with an enforcement order as it had failed to meet the target of 92.5% next day delivery for the two services.

During February and March 2003, just 86.3% of PPI and 86.8% of First Class Response Services reached their destinations the next day.

Following an investigation Postcomm ruled the Royal Mail had failed to use "reasonable endeavours" to improve delivery times.

Postcomm said: "The Commission believes Royal Mail had not followed its own audit processes in checking service quality and had not made all reasonable endeavours to meet the service standards consistently across the country."

The Royal Mail now has 28 days to appeal.

Otherwise it will have to pay up, in one instalment, in 49 days time.