The future of Channel 4 as an independent commercial broadcaster looks to be over today after media regulator Ofcom called for the creation of a new larger public-service broadcaster as an alternative to the BBC.

Ofcom said in a long-awaited report that C4 should link up with another partner such as Channel Five, owned by German media group RTL, or the BBC's commercial arm BBC Worldwide.

C4 is losing money and the regulator said it is vital that there continues to be an alternative public-service broadcaster to safeguard the output of current affairs, regional news, drama and children's programming.

But Ofcom ruled out giving a chunk of the BBC licence fee, known as top-slicing, to rival broadcasters. Instead it suggested that a one-off sum of £130 million, already earmarked for the BBC to fund the switchover from analogue to digital, could be used to help fund the start-up costs of the enlarged alternative to the BBC.

“It is our main recommendation for Channel 4 to create a strong, alternative public-service voice to the BBC, with Channel 4 at the heart, preferably though partnerships, joint ventures or even mergers,” said Ofcom. “A new remit, governance and accountability will be essential.”

C4 chief executive Andy Duncan, who is opposed to a merger with Five, still welcomed Ofcom's findings, which had been heavily trailed. Those close to Channel 4 dismissed the idea that Ofcom's proposals were a blow. The BBC has resisted the idea of BBC Worldwide merging with C4. The BBC Trust said today it “remains convinced the BBC partnership approach [such as joint ventures] holds the best chance of finding solutions that create new value rather than simply transfer existing value”.

Ofcom's report also said that ITV will be allowed to cut its public-service obligations. The regulator said of ITV: “We believe it should be an essentially commercial network.” ITV shares were today down 1.75p at 30p.

Ofcom chief executive Ed Richards said: “The central challenge is how a strong and historically successful public-service broadcasting system can navigate from analogue to digital.

“These proposals set out what we believe is required to fulfil a vision of diverse, vibrant and engaging public service broadcasting content.”