Post Office Ltd (POL) will now be granted the money to fund country branches, which include more than 1,000 in Scotland, for the next two years.
The decision by the European Commission will come as a huge relief to rural communities after Adam Crozier, chief executive of the Royal Mail warned that more than 10,000 post offices across Britain could close within the next four years.
The government requires POL to keep rural counters open, even if they are loss-making, to give local communities access to essential services such as income support and postal operations.
But ministers had to persuade Brussels that the extension of the funding did not represent unfair state aid.
Neelie Kroes, the EU Competition Commissioner, said: "I am satisfied that the funding is proportionate to POL's public services obligation.
"I am happy to endorse a measure which will benefit British consumers in rural areas without distorting competition."
A spokeswoman for the Royal Mail welcomed the move, but warned the funding would have to be extended further than 2008 to stop branches from shutting.
She said: "Confirmation of funding for the next 25 months will give some reassurance to the 8,000 rural post office branches serving small local communities across the UK, but their future when their funding runs out in March 2008 is unclear.
"These branches will lose more income because the Post Office card account begins to wind down prior to its abolition by the department of work and pensions in 2010.
"In these circumstances even greater funding levels will be needed to maintain a network at the current size."
Post Office revenues have decreased after the government introduced direct payment of benefits such as state pensions that were previously channelled through the post office.
Royal Mail lost its monopoly on post deliveries on 1 January and the state-owned operator is fighting hard for business as the country's postal service faces some of the biggest changes in its 350-year history.
The minister for competitiveness Barry Gardiner said: "The government has made unprecedented investment of more than 2 billion to help maintain the Post Office network since 1997.
"We made the argument in Europe to continue supporting Post Offices. We welcome this decision which will allow the government to fulfil its pledge to support the rural Post Office network for a further two years."
Clive Davenport of the Federation of Small Businesses welcomed the decision, adding: "Rural post offices are an indispensable lifeline for small businesses.
"With the declining number of rural bank branches in many areas, the Post Office is the only option for many firms for their day-to-day banking needs.
Keeping them in place is vital."
Mr Crozier's comments came amid increasing pressure from Royal Mail for the government to extend the three-year support package, which ends in 2008.
He said that Royal Mail needed a rump of only 4,000 post offices to fulfil its licence obligations for delivering mail. The remaining 10,500, of which 8,000 are loss-making rural offices, needed to gain extra government subsidies or become profitable to survive.
It is thought that Royal Mail wants a decision urgently so that it can deal with contracts related to the network and manage closures, if necessary.