A collector's item: art dealer's £125m gift to the nation is celebrated

Anthony d'Offay is one of the most powerful figures in the world of elite art dealers, with a Midas touch for discovering new talent. His collection boasts works by some of the biggest names in modern art.

And now he is handing it to the nation. D'Offay became the most significant art philanthropist in modern British history yesterday after announcing he would donate virtually all of his collection – including personal gifts made to him by Andy Warhol and Joseph Beuys – to be held in the care of Tate Gallery and the National Galleries of Scotland.

D'Offay, 68, has given 725 paintings, drawings, sculptures and photographs worth £125m in the charitable gesture that has inspired praise from the Prime Minister, Gordon Brown, and the Tate's director, Sir Nicholas Serota. The astonishing move will transform that gallery's roster of contemporary art and turn it into one of the strongest in the world.

Sir Nicholas said: "A gift of this magnitude will completely transform the opportunity to experience contemporary art in the UK. Anthony d'Offay's imaginative generosity establishes a new dynamic for national collections and is without precedent anywhere in the world." John Leighton, the director of the National Galleries of Scotland, added: "At a stroke, our level of ambition has been raised to a new height and there is now the potential to bring great modern art to our publics, not just in Edinburgh and London, but right across the country, from St Ives to Stromness."

The collection was sold to the nation by D'Offay at the cost price of £26.5m – from which the dealer will not profit – and which amounts to just one fifth of its market value. The costs for the artworks amount to £28m, £20m of which has been paid by the governments in Edinburgh and London. The National Heritage Memorial Fund has given £7m and The Art Fund £1m to buy and display the works. The Department for Culture, Media and Sport has also paid the Treasury £14.6m in taxes which D'Offay would otherwise have paid.

Britain's contemporary art collections have been regarded as relatively weak when compared to those in the US and parts of Europe such as Germany, a fact that this donation will help overturn. The Tate's limited photographic collection, for example, can be transformed into an exemplary archive with some of the strongest material by Dianne Arbus and Robert Mapplethorpe – who is not currently represented in any national collections – now in its hands. The donation includes D'Offay's gallery archive of more than 1,000 boxes, which provides a unique record of contemporary art over 30 years.

The pieces, by 32 artists, will be displayed in 51 dedicated "artist's rooms" as part of a permanently moving series of exhibitions in galleries across England and Scotland, with the first beginning next spring.

Three rooms will be dedicated to Arbus's 69 photographs; six to Warhol's evolving pop art; five rooms filled with 20 sculptures and 110 drawings by Beuys; two dedicated rooms to nine works by Gilbert & George; and a Damien Hirst space that will include one of his early pickled installations, Away from the Flock, from 1995, as well as an early "spot" painting and a large new work from his "butterfly" series. Works by Jeff Koons, Bill Viola, Bruce Nauman, Georg Baselitz and Richard Hamilton will also feature.

The Prime Minister said the gift would "open up art to new audiences" and that "individual acts of generosity like this impact on the lives of millions, and reinforce the UK's richly deserved reputation as having a range of world-leading museums and galleries".

D'Offay admitted the decision to give up some of his favourite pieces had not been easy, but that it has left him feeling like a "teenager all over again". He said of the donation: "We originally wanted to give young people access to contemporary art outside London. I was thinking about being a teenager myself when you didn't have any access to art of your own time."

His agreement includes the provision for a £5m endowment fund, the interest from which will be used for the acquisition of further works by important contemporary and emerging young artists, ensuring that the collection can continue to grow.

"This way we can enjoy seeing it grow and it is much more exciting than putting it in your will. Our favourite pieces are in the donation – there were very beautiful Beuys pieces given to us personally and personal works from Warhol, but everything is on loan in this world. Being able to share them in this way with young people is a privilege," he said.

By the time D'Offay opened his London gallery in 1969, he was already friends with Warhol and Beuys and had worked with the good and the great on the London arts scene, including Serota at the Whitechapel Art Gallery. D'Offay was known as a "star maker" who always had his eye – and his wallet – on the next emerging artist.

Born in Sheffield in 1940, D'Offay studied art at Edinburgh University and graduated in 1962. While in the city, he fell in love with the collections of the National Gallery there and years later described walking around those rooms as "the defining experience of my life".

In the years following the opening of his Dering Street gallery, he staged a glittering series of seminal shows for artists including Lucian Freud, Gilbert & George, Eduardo Paolozzi and Frank Auerbach.

In 2002 he announced his retirement and shut his gallery, sparking rumours of a huge philanthropic gesture.