The Government today abolished the BBC Board of Governors and carved up its powers between two new bodies.

Tessa Jowell, the Culture Secretary, announced sweeping reforms of the BBC management structure to MPs as her department published a Green Paper on the future of the BBC.

But the system of funding the BBC through the television licence fee will be left in place. Ms Jowell said that the Corporation's Royal Charter will be renewed for a further ten years, during which it will continue to receive funding from its licence fee.

The reforms were generally seen as a good outcome for the BBC, which was badly shaken by a row with the Government over the Iraq war and criticised in a subsequent review by Lord Hutton. The governors were singled out in that report for failing to respond to the complaints made by Downing Street and their chairman, Gavyn Davies, was forced to resign.

Under the proposals, the BBC's Royal Charter, which expires in 2006, will be renewed for ten years. During that time the country's primary public service broadcaster will continue to be funded by its licence fee, which brings in about £2.8 billion a year.

But the Board of Governors will be abolished and replaced by two separate new bodies - the BBC Trust and an Executive Board.

"There is widespread consensus that the current model of Governance is unsustainable," Ms Jowell told MPs. "The Governors' dual role as cheerleader and regulator does not sit easily in a public organisation of the size and complexity as the BBC. It lacks clarity and accountability."

Ms Jowell said the Trust would be the "custodian of the BBC's purposes, the licence fee and the public interest". Its first chairman will be Michael Grade, the current chairman of the Board of Governors, who was appointed to replace Gavyn Davies after the Hutton criticisms. Mr Grade was watching Ms Jowell's speech from the Commons' gallery.

The Executive Board, reporting to the Trust, will be responsible for delivery of BBC services. Its chairman will be appointed by the Trust.

"The BBC Trust and Executive Board will provide much-needed daylight between two quite separate roles - running the BBC and making sure it is run well," Ms Jowell said.

And she warned the BBC that it would have to remain true to its public service broadcasting values, and not chase commercial opportunities for the sake of them. "It should not play copycat or chase ratings for ratings' sake," she said.

The Culture Secretary paid tribute to the BBC, saying that it was, alongside the National Health Service, "one of the two great institutions of British national life", its archive "a record of our national collective memory". But it faced many challenges, mainly brought by the transformation of media by the arrival of cheap digital technology, and criticisms from competitors and customers.

She added: "Perhaps surprisingly, the licence fee retains a high degree of public support. And although not perfect, we believe it remains the fairest way to fund the BBC, so it will continue throughout the next Charter."

During that time the Government would review funding arrangements for the period after 2016, paying special consideration to the idea of a subscription model, the Culture Secretary added.

Dan Sabbagh, the Times Media Editor, said Mr Grade had got largely what he wanted from the reforms, adding: "The BBC is left intact, and it remains largely free to govern itself."

Mr Grade himself was careful not to celebrate too much, however, and expressed regret that the Government had not waited to see the results of the BBC's own reforms aimed at separating the Corporation's governance and management structures.

Mr Grade intends to install Mark Thompson, the current director-general, as chairman of the new Executive Board, meaning that there will be no change in the BBC leadership.

He also argued that the BBC licence fee would have to be retained indefinitely if British viewers and listeners wanted to enjoy the same standard of programmes that they do now.

"I personally have always believed that you dilute the BBC if you put it into competition for revenue of any kind, whether advertising or subscription," Mr Grade said. "If you want the BBC to deliver what it is presently delivering, you have to have the licence fee."

John Whittingdale, the Tory culture spokesman, dismissed the proposed changes as "largely cosmetic" and said that although the Government had taken the right approach, it had failed to go far enough in almost every area. The BBC needed a separate external regulator, not the proposed Trust, he said.

But Kelvin MacKenzie, the former Sun editor who is one of the BBC's loudest critics, was less complimentary, saying the licence fee should be scrapped. Mr MacKenzie, now chief executive of the Wireless Group, said that the BBC no longer had a role in a multi-channel world. "It was great in a one channel, two channel, three channel environment. But actually its moment has come and gone," he told the BBC.

And he criticised the decision to "shoot" the governors and replace them with another set of "establishment dimwits". Mr MacKenzie said BBC audiences would now collapse because their popular programmes would have to be scrapped as executives tried to justify their charter.

Mr Grade dismissed the criticism, telling Sky News: "I'm not sure that Kelvin speaks for the nation. He speaks for Kelvin."

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