The privatisation of Royal Mail did not achieve the best value for taxpayers because of the government's "deep caution", the spending watchdog says.
The National Audit Office said too much emphasis was put on completing the sale within this Parliament, at the expense of achieving better value for money.
Royal Mail shares are now more than 70% higher than the original sale price of 330p in October 2013.
But business minster Michael Fallon said it was "right to be cautious".
Speaking on the BBC's Today programme, he said: "We could have got a higher price but we would have taken a bigger risk of people not subscribing to the shares and the Royal Mail share sale collapsing."
Cancelled strikeThe privatisation of Royal Mail took place amid huge public interest and the shares rose by 38% to 455p on their first day of trading, representing an increase in value of £750m for the new shareholders.
The NAO report concluded that the Department for Business, Innovation and Skills was too cautious when setting the sale price of 330p per share.
"The department was very keen to achieve its objective of selling Royal Mail, and was successful in getting the company listed on the FTSE 100," said Amyas Morse, head of the NAO.
"Start Quote
End Quote Vince Cable Business SecretaryAchieving the highest price possible at any cost and whatever the risk was never the aim of the sale"
"Its approach, however, was marked by deep caution, the price of which was borne by the taxpayer."
A planned postal workers' strike, which was eventually cancelled after the privatisation, also affected the government's sale price.
Demand for Royal Mail shares was 24 times the maximum number available to investors, the NAO said, but the banks overseeing the sale advised there was not sufficient demand to justify a significantly higher figure.
George Godber, a fund manager at Milton Group, told Radio 4 that he was "astounded" by the low price.
"I thought it was significantly underpriced. In stock market terms, this was the London 2012 Olympic ticket moment, lots of people applied but very few got to go to the opening ceremony."
Managers from two of these advising banks - Goldman Sachs and UBS - said market uncertainty and the complexity of the deal led them to a conservative price when they were questioned by MPs in November last year.
Continue reading the main storyThey said there was a significant risk that raising the price past the £3.30 they had advised would diminish investor interest.
The NAO report notes the government has benefited from the increase in Royal Mail's share price via the 30% stake it still holds.
But it argues the benefits could have been even greater had the government kept a larger stake, while still fulfilling its policy objective of reducing public ownership to below 50%.
OverhaulThe spending watchdog also noted that a small number of priority investors, who were allocated a larger proportion of their orders than others, have made significant profits from the increase in the sale price following the privatisation.
"Start Quote
End Quote Chuka Umunna Shadow business secretary[Vince Cable] and David Cameron have serious questions to answer on the hundreds of millions of pounds they have lost British taxpayers"
Responding to the report, Business Secretary Vince Cable said: "Achieving the highest price possible at any cost and whatever the risk was never the aim of the sale."
"The report concludes there was a real risk of a failed sale attached to pushing the price too high. And a failed sale would have been the worst outcome for taxpayers and jeopardised the operation of Royal Mail going forward."
And a spokesman for Mr Cable's department said the sale had raised some £2bn for the taxpayer.
They added: "By retaining a 30% stake in the business we have made sure taxpayers have benefited from dividend payments and will continue to benefit from share price rises after the sale."
However Margaret Hodge, chair of the Public Accounts Committee (PAC), said the sharp rise in Royal Mail's share price since the sale showed "the department had no clue what it was doing."
And shadow business secretary Chuka Umunna said Mr Cable could no longer dismiss the share price rise.
"He and David Cameron have serious questions to answer on the hundreds of millions of pounds they have lost British taxpayers and cannot duck responsibility for what has happened," he added.
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