The government had planned to pay off the group's deficit, which is expected to rise from the £3.6bn reported in 2006 to £9bn or more later this year, as part of the part-privatisation deal.
But yesterday business secretary
Mandelson told the House of Lords that there was "no prospect" of the partial sell-off of Royal Mail going ahead in the current economic conditions.
The news was met with condemnation from the Conservative Party, which said it would have supported the government.
However, Gordon Brown would have faced a rough ride from Labour back benches and trade unions.
Following the collapse of the deal, Mandelson responded to concerns raised over the pensions deficit, saying that it is a "matter for the company and the pensions trustees".
Mandelson, while acknowledging that the pensions shortfall was a huge and growing burden", stressed that that burden should not fall on taxpayers.
However, one Labour peer, Lord Clarke of Hampstead, said that it was up to ministers to "urgently get down to talking" about the pensions deficit.
The CWU union, which represents Royal Mail's postal workers, said that it was vital that the government did not walk away from Royal Mail.
Conservatives warned that putting the pension plans in "cold storage" forced trustees of the pensions plan into an "impossible position".
The part sell-off had been due to go ahead before Parliament's summer recess.
On the same day that Mandelson announced the shelving of the deal, the CWU announced that its postal workers would strike -- staging a three-day walkout across the capital from Wednesday next week.
The CWU claims that Royal Mail is cutting jobs and services while failing to modernise the business.
Royal Mail said the industrial action undermined the group's supposed commitment to modernisation.
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