Postal business Whistl - formerly TNT Post - has suspended its door-to-door delivery service in London, Liverpool and Manchester and is consulting 2,000 workers on redundancy.
The move follows a decision last month by potential investment partner LDC not to fund its expansion plans.
Whistl will continue to provide a service, but will revert back to using the Royal Mail for the "final mile".
Shares in Royal Mail rose 3.3% after the news was announced.
Last month, LDC, a division of of Lloyds Banking Group, decided against investing in Whistl because of "ongoing changes in UK postal market dynamics and the complexity of the regulatory landscape".
At the time, Whistl said it would hold back from expansion but planned to continue its existing service.
Whistl said: "Following the announcement from LDC that it would not proceed with the proposed investment... to fund further rollout of E2E [end-to-end] we have now commenced an extensive review of the viability and potential for the rollout of an e2e postal delivery service in the UK."
Whistl said it would begin consultations with employees affected by the suspension of the end-to-end service, and with their union representatives.
The Manchester Evening News carries what it says is a copy of the letter to employees, which says most of the staff were on zero-hours contracts and will not be paid during the consultation process.
Community, the recognised trade union at Whistl, says its members are "extremely worried for their futures".
Les Bayliss, national officer at Community, said they would work with the company to try to safeguard jobs: "We will be doing all we can to identify a viable way forward for the business that safeguards our members' jobs.
"We should be clear that this is a suspension of the business, not a termination of it, so we will be looking for the company to work with us to identify sustainable options to continue operations as soon as practically possible."
One Manchester-based employee contacted by the BBC said the news had come "completely out of blue... Grown men were crying this morning. It was heart-breaking.
"It was a brilliant job, we loved our job... We will all have to go back on the dole now."
Analysis, Mark Edwardson, BBC North West Tonight
As you can imagine, the mood's pretty glum at Whistl depots in the North West. I spoke to a worker at Whistl's Eccles depot earlier.
He said he and his colleagues turned up for work to collect their deliveries at about 06:15 BST but all they picked was up their redundancy notices - which came as a bolt from the blue.
Andrejs Cibis said: "Everything was going right. No one was expecting it to happen to us... but [it has] happened."
Royal Mail has complained in the past that competitors such as Whistl operate at an unfair advantage because they do not have to deliver to the whole country for a single price.
A Royal Mail spokesman said: "As the universal service provider, Royal Mail is ready to accept the additional volumes into our network and we will ensure delivery meets our usual high standard of service. We are liaising with Whistl to make certain customers aren't impacted in any way."
Whistl changed its name from TNT Post last year as part of a 2011 separation agreement with its former owners.
It began delivering in West London in April 2012, later rolling out its end-to-end service in Manchester and Liverpool.