Through the 11,500-strong network, the Post Office banking service will offer a current account, children's savings account, a mortgage that is aimed at first-time buyers, business services, and a weekly budgeting account that allows low-income households to better manage their money. The services will be rolled out in the next 12 months.
The government also revealed funding of £180m for 2011/2012 to help maintain the network's current size.
Announcing the initiative, Business Secretary Peter Mandelson said: "The Post Office is a well-loved community institution and this move will bring more banking services back to the heart of communities."
Business Minister Pat McFadden added: "The Post Office can provide a range of good value, simple financial products for everyone. These are the messages that people have given us and we are acting on them a major step towards making the Post Office a sustainable neighbourhood banking service."
Paul Mather of Sherston Post Office in Wiltshire welcomed the proposal. "I'm delighted that the government will be supporting the Post Office bank," he said. "It'll differentiate the network from commercial banks and offer the public another option. Hopefully, they'll also spend the £180m wisely and use it to improve the network."
The announcement was hailed by the Communications Workers Union general secretary Billy Hayes as "a step in the right direction", but shadow business secretary Ken Clarke said the move was "too little, too late" given the closure of 6,400 branches over the past 10 years.