Royal Mail has lost a crucial contract with its second largest customer, the online retailer Amazon, as a wave of strikes threaten parcel deliveries in the busy pre-Christmas sales period.

The news comes on the eve of a national strike announcement by the Communication Workers Union that is likely to bring the simmering industrial dispute to the boil and further disrupt deliveries across the country.

CWU members are angry about the Royal Mail's handling of its modernisation programme and are expected to escalate their programme of local strikes in a dispute they say is about consultation over changes to working practices.

But a backlog of undelivered mail has worried customers, particularly small businesses and internet retailers who argue that the unpredictable nature of the strikes has led to a collapse in reliability. The loss of this business will be a severe blow to Royal Mail, which was relying on the growth of online shopping to compensate for the decline of its letters business due to rising email use.

Customers of eBay have already been particularly vociferous, claiming the strikes are causing damage to small businesses that suffer negative feedback and lose their online reliability ratings.

Now the Guardian has learned that Amazon.co.uk has cancelled its long-term contract to use the Royal Mail for parcels over 500 grams and will use a rival service, Home Delivery Network (HDN), which also delivers for Tesco and Argos.

HDN declined to comment directly, citing commercial confidentiality, but the Amazon contract is thought to be worth at least £25m and is one of the first times a major sender of medium-sized parcels has chosen to defect from the Royal Mail in this way. Until now, the state-owned operator has won the bulk of new internet business.

HDN's chief executive, Brian Gaunt, said he expected others to follow suit once the national strike ballot was passed. "We are seeing a number of our customers preparing to start marketing their deliveries as free of Royal Mail risk," he added.

Two years ago Royal Mail lost a smaller Amazon contract worth £8m to deliver second class parcels during the last national strike, but fought hard to win the business back, claiming improved industrial relations. Losing the new, bigger contract will exacerbate the operator's financial woes, which lay behind its need to cut staff, but more worryingly sends a dangerous signal to other suppliers about Amazon's faith in the network during the crisis.

Last night the CWU said it regretted disruption caused by the strikes, but added: "We are very concerned that if we don't get this right now, there will be a lot more disruption to customer services in future." It blames the way private competition has been allowed to "cherry pick" profitable parts of the postal market and fears more damage will be done in future: "The scale of change planned … is frightening."

Royal Mail declined to comment.

Even if private sector rivals do step in to take some of the contracts, it is unlikely to prevent major disruption. HDN says it would be unlikely to get enough resources in place at short notice to compensate.

More importantly, there is very little alternative for delivery of letters, with private operators such as TNT and DHL using Royal Mail for crucial parts of their delivery infrastructure.

The last time CWU members called a national strike in 2007, it was solved when Royal Mail managers agreed to series of pay deals and also offered to talk further about consulting the union on changes.

Complaints against Royal Mail

Local strikes have been spreading across the country, largely unreported. This week alone, 24-hour stoppages are scheduled in locations including Bristol, Kilmarnock, London, Carlisle, Coventry, Chelmsford, Leeds, Nottingham, Swindon and Warrington.

There have been reports of mountains of undelivered mail in sorting offices and claims that postal workers are not waiting to see if customers are in before leaving cards asking them to pick parcels up from the sorting office.

The Royal Mail disputes some of the claims, but has used managers to try to shift the backlog, exacerbating tensions. The CWU is not expected to give details of its strike plans, but they are likely to involve rolling action, targeting different parts of the chain on different days, causing maximum disruption without too much loss of pay.