AIB was adamant yesterday that the deal with An Post did not signal its withdrawal from rural Ireland.

On the contrary, the State's largest bank said it would maintain branches in every town and village for the next five years as part of its medium-term strategy.

The managing director of its Republic of Ireland division, Mr Eugene Sheehy, said it was wrong to assume the deal paved the way for withdrawal after that.

The bank portrayed the initiative as an extension of its core offering, just as account-holders can use telephone, internet and hole-in-the-wall services. In short, it said, the deal meant customers could lodge and withdraw money at 1,000 post offices, in addition to its 280 branches.

When the service opens in July, this will have clear benefits for individual customers and for business clients, who will be able to lodge their takings at post offices. Post offices have longer opening hours during the week and they also open on Saturdays.

An Post projects it will gain three million transactions annually from the deal. At that level, the initiative is said to be worth about £2 million (€2.5 million) each year to the State company in commissions.

AIB argues the initiative will free up branches for customers who wish to conduct non-cash business such as cheque lodgements, loans, mortgages and advice.

That works in theory. Yet while there is no suggestion that the bank will withdraw from the cash business, this element of its offering is just the latest to be farmed out to An Post.

Last April for example, AIB and the other retail banks sought to transfer to An Post their paper-based bill-payment service for domestic services such as gas and cable television.

The Competition Authority objected to that deal and its considerations on the matter continue.

But there is more to the latest AIB deal. If large sums lodged by business customers are held at the post offices, then less cash will have to be transferred from the banks to the post office for weekly social welfare payments.

Transferring cash is expensive and risky so there are significant benefits there too. Mr Sheehy said insurance and security costs were rising at multiples of inflation.

In recent weeks the postal company secured a contract for bill-pay services from the ESB, from which it stands to gain four or five million transactions each year. If the Competition Authority sanctioned last April's agreement, the company could secure a further five or seven million transactions.

All that is good news for a company whose post office network is technically insolvent, almost bankrupt and likely to lose up to £80 million by 2004.

Yet these deals alone will not save the post office network and it is notable that the AIB plan is confined to 1,000 automated post offices. Some 900 others are excluded.

In addition, uncertainty surrounds the company's contract to issue social welfare payments, which is the subject of a challenge in the European Courts by a US firm, Transaction National Services. RT╔ is unhappy also with An Post's performance of the contract to collect television licence fees.

The Government has ruled out a subsidy and a working group comprising An Post, the Irish Postmasters' Union and government Departments is working on alternatives.

The bundling of postal services with other retail services and the development of post offices as a one-stop-shop for government are under discussions, although neither is likely to bridge the funding gap.

AIB will have exclusivity for two years to reflect its investment in the service, according to its spokeswoman, so the way is open to An Post to do similar deals with competing banks. The company is said to have approached Bank of Ireland in the past, but the contact led nowhere.

While Ms O'Rourke proposed earlier this year that the banks pay up to £20 million for the upkeep of post offices, yesterday's deal was not linked to the suggestion. Her spokesman said: "Nothing has come of it but the proposal still stands."