His comments come as the government revealed that it had given the network a five-year contract to issue photographic driving licences.
Mandelson said the Driver & Vehicle Licensing Agency contract for driving licences demonstrated the government's commitment to the Post Office network, but he added: "The Post Office can turn itself into a real front office for government, but it must innovate, look to the future and identify new opportunities and new ways of doing business."
However, the National Federation of Subpostmasters (NFSP) has warned that it needs government to further increase the number of services available.
In a NFSP report on reforms needed it called on the government to use the Post Office more as a face-to-face representative for government services, and appealed for action in the setting up of the Postbank to increase the functionality of the Post Office Card Account.
Speaking at the launch of the report, NFSP general secretary Geoff Thomson said: "We can continue down the path of further closures, loss of work and general indifference, or we can change things by being bold and decisive to make the most of this vital national asset which binds local communities and economies together."
The call coincides with a series of parliamentary select committee meetings on the future of the Post Office, in which retailers have been giving their views.
Sue Wood, national manager for the Post Office for the
Co-operative Group, told MPs there was a "definite need" for the post office's services. "The structure of the post office means it is well placed to offer data protection, sensitivity and one-on-one transactions," she said.