Chris Smith, the Secretary of State for Culture, Media and Sport, announcing a review of the way the corporation is funded, declared that the licence fee is safe at least until 2006 when the BBC's charter is renewed.
He will consider allowing extra money to be found by selling advertising and sponsorship on digital channels such as BBC Choice and BBC News 24 after 2002 when the current licence fee agreement runs out. BBC1, BBC2 and the local and national radio network are to remain free of advertising.
An independent panel will be created in the next few weeks to consider the BBC's future funding. It will also be charged with looking at how concessions to the licence fee can be made fairer. Pensioners living in sheltered housing now qualify for a discount on the licence fee, while other pensioners do not.
The review is an acknowledgement that the BBC can no longer find extra money for programmes by squeezing efficiencies out of its operations.
However, industry insiders believe it is also an admission that raising the fee by above the rate of inflation is politically unacceptable to the Government.
The BBC started a lobbying campaign to get the fee raised by more than the rate of inflation earlier this year. Mr Smith yesterday refused to be drawn on whether he would accept a recommendation from the review panel to increase the licence fee faster than the rise in the cost of living. The panel will report to the Government next summer.
Announcing the review to a Royal Television Society symposium in London, Mr Smith said: "It is not yet appropriate to consider alternatives to the licence fee as the main source of BBC funding, which, whilst an imperfect funding mechanism, remains for the foreseeable future the best means to provide the BBC with sufficient security to continue to meet its obligations to all audiences." But he added: "The BBC must be capable of adapting, surviving and prospering in the fragmented modern market."
He also outlined a five-point definition of what the BBC is for. He said it should be a benchmark for quality, provide something for everybody, expand people's horizons, operate efficiently and reflect Britain's cultural diversity.
Reacting to the announcement Sir John Birt, the director general of the BBC, said: "We welcome it as most constructive. How heartening to hear the Secretary of State's vision about the BBC. I don't think anybody here from the BBC would want to change a single word."
Under the current regulations, channels using the BBC name in the UK are banned from taking advertising. Instead the corporation has created joint venture channels with commercial broadcasters, such as UK Gold and UK Horizons.
These take advertising and sponsorship and use BBC programmes, but they do not carry the BBC name.