First and second class stamp prices are to increase by 14p from next month to record highs of 60p and 50p, the Royal Mail announced today.
Prices will rise from the current 46p and 36p from April 30, while the cost of posting large letters will increase from 75p to 90p for first class and 58p to 69p for second class.
The increases followed a decision by regulator Ofcom to give Royal Mail the freedom to set its own prices.
Royal Mail said that even after the increases, second class stamps will still be the cheapest in Europe while first class will be around average.
The Royal Mail also announced that millions of people on low incomes will be able to buy up to 36 stamps for Christmas at the current price.
The new prices, showing increases of 30% for first class and 39% for second class, follow a huge reduction in the number of letters posted - down from 84 million a day six years ago to 59 million today.
Royal Mail chief executive Moya Greene said: "We know how hard it is for households and businesses when our economy is as tough as it is now.
No-one likes to raise prices in the current economic climate but, regretfully, we have no option.
"Royal Mail provides one of the highest quality postal services in Europe for amongst the lowest prices for both consumers and business.
"That service is under threat from declining volume, e-substitution and ever increasing competition. Because of these pressures Royal Mail has lost £1 billion over the last four years; the sustainability of the service is now at risk.
"Price increases are needed to return the universal service to sustainability."
A Department for Business spokesman said: "Price rises are never welcome. However ministers are clear that the top priority is to protect the universal service on which people rely.
Indeed we have enshrined in law the six day a week, one price goes anywhere service and given Ofcom as the regulator the duty of protecting that service.
"But this service comes at a cost, and its provider, Royal Mail, needs to be financially viable. The most important thing is to secure the universal service, but price rises are only one part of the story, the successful modernisation of Royal Mail is also crucial.
"We welcome Royal Mail's announcement that it will offer discounted stamps to some low-income households this Christmas, helping to reduce the impact on the most vulnerable."
Around five million people on pension credit and employment and support allowance or incapacity benefit will be eligible for the Christmas scheme, offering them the chance to buy up to three books of 12 stamps at 2011 prices.
Ms Greene said the universal service, under which the Royal Mail delivers to any house in the UK for the same price, was in "peril" without higher stamp prices.
"This is a very high quality, cherished service, but it needs to be paid for. The increase will restore our finances and maintain the universal service. We had no alternative but to increase prices."
Ms Greene said research showed the average household spent 50p a week on stamps, so she believed there was no "affordability issue" with higher prices.
Over the last four years, Royal Mail has made a loss in its core mails business, including packets, of almost 31 billion.
It said there had been a "significant deterioration" in its finances, blaming artificially low prices, falling volumes and less mail being delivered to an increasing number of addresses - up from 27 million to 29 million since 2003.
Mail volumes fell by 25% in six years and are expected to decline by around 5% a year for the foreseeable future.
Royal Mail also pointed out that service standards in the UK are "appreciably higher" than in many other EU countries, with deliveries over six days against an EU minimum obligation of five days, and a next-day target of 93%, the highest for any major European country.
The workforce has been cut by 50,000 over the past decade and 16 mail centres have closed.
Ofcom said that, subject to the safeguards it is putting in place, Royal Mail will make decisions on the price of stamps, not the regulator, adding that it had put a cap on the price of second-class stamps for standard letters to protect vulnerable consumers.
Over the next seven years, this will ensure that Royal Mail can price second-class stamps no higher than 55p. The cap will be indexed in line with inflation.
"The central aim of the decisions announced today is to ensure that Royal Mail's universal service obligation (USO) is financially sustainable and provided efficiently.
"Without regulatory changes, there is a risk that Royal Mail may not be able to continue to deliver the USO to the same standard as today," said an Ofcom statement.
Stuart McIntosh, Ofcom's group director of competition, said: "Ofcom's decisions are designed to safeguard the UK's postal service, ensuring it is sustainable, affordable and high quality, to the end of the decade and beyond.
"The measures ensure that Royal Mail's products remain affordable for vulnerable consumers and small businesses."