The Royal Mail's 350-year monopoly is to end at the start of 2006, 15 months earlier than previously planned.
The Royal Mail says it is ready for the challenge
The UK's postal service market will be fully liberalised from 1 January 2006, regulator Postcomm announced, following three months of consultation.
From that date, any licensed operator will be able to deliver mail to business and residential customers.
Royal Mail, which controls 99% of the market, welcomed the news but the main postal union said it was "ill-advised".
The Communication Workers Union (CWU) warned the decision will place "the country's cherished universal service in jeopardy".
The CWU also criticised what it said was a "competition at all costs" ethos which it says will put the Post Office at a serious competitive disadvantage to its European rivals.
Ready for competition?
However, the Royal Mail and consumer watchdog Postwatch have welcomed the decision.
"We're ready," said Royal Mail chief executive Adam Crozier.
"We recognise that the regulator is getting on with his job, and welcome faster competition as long as it comes without unfair restrictions on Royal Mail."
"Royal Mail must have the freedom and flexibility to set the right prices, based on real costs," Mr Crozier added.
"If that happens, I think the new competitive environment will succeed. Competitors are already targeting profitable business mail. We need to compete with them on price as well as service if we are to keep the universal service in business."
In the new market, Royal Mail will still be required to provide a universal postal service for first and second class mail of one delivery and one collection each working day at a uniform price throughout the UK.
Consumer body Postwatch chairman Peter Carr welcomed the announcement.
He said: "Ultimately this will lead to more choice, and hopefully a better service."
However, he said there were still issues to be addressed, such as cost of access to the Royal Mail "pipeline" for letters.
The Royal Mail will still be obliged to provide a uniform UK service
Until now, competition in the £4.5bn market has been restricted to 30% of the value of the letters market and to companies handling bulk mail in batches of 4000 letters or more.
Full market opening means that licensed operators can collect and deliver any mail, from single letters to bulk mailings.
They can set up collection boxes, provide collections and deliveries between businesses, offer tracked mail services or mail deliveries at a guaranteed time.
Postcomm will shortly publish arrangements for the new multi-operator market.
These will include a code of practice to ensure mail companies co-operate on issues such as the forwarding of mail and handling mail that is returned to sender and a separate code to safeguard the integrity of the mail.
At present, Royal Mail alone is exempt from VAT, which means it has a significant price advantage over rival firms, and Postcomm said "competition issues" would be addressed.
But the CWU union fears the change is too much too soon.
It says the regulator has moved in a way that is "completely out of step with the carefully managed approach" set out in European legislation.
"In so doing, Postcomm has placed significant extra pressures on the Royal Mail Group at a time when it is undergoing far-reaching internal and external changes," said CWU deputy general secretary Dave Ward.
"The upshot will be to place very real pressures on Royal Mail's ability to meet its universal service obligations."