Unveiling its final report into the future provision of public service broadcasting, Ofcom said that there should be a "financially robust" alternative provider of public service content alongside the BBC.
It said this as-yet-undefined body should have Channel 4 "at its heart", created by forming partnerships, joint ventures or mergers between Channel 4 and other organisations. One option, Ofcom said, would be for Channel 4 to form a new relationship with BBC Worldwide, the BBC's commercial arm.
Another option could be for Channel 4 to merge with a commercial organisation, such as Five. However, Ofcom highlighted that any such partnership would need to "maintain and strengthen" the delivery of public service content.
Channel 4 has been pressing the Government to clarify the broadcaster's future funding model and has been lobbying for extra funding. In an earlier report into PSB last year, Ofcom agreed that the broadcaster faces a potential £100m budget deficit.
The subject of Channel 4's future, and the wider issue of the future of public service broadcasting, now moves from Ofcom to government. Ofcom said that decisions are needed by the Government "within the next year as the current public service broadcasting model is not sustainable". Communications Minister Lord Carter's report into the future of the UK's digital industries, due out next week, will also shape the government's policy.
Among its other proposals, Ofcom confirmed that ITV would also be allowed to significantly cut its public service programming obligations. ITV could also drop some regional news bulletins, reduce non-news regional programming by half and cut back on its current affairs shows.
Ofcom also recommends that Five should continue to broadcast national and international news and original UK content.
Ed Richards, Ofcom chief executive, said: "Many people have forcefully expressed their views in the wide-ranging debate about the future of public service broadcasting. But there is one group whose opinions matter more than anyone else: viewers and listeners.
"The central challenge is how a strong and historically successful public service broadcasting system can navigate from analogue to digital.
"Our proposals aim to sustain the quality and creative spirit of public service broadcasting while capturing the opportunities of broadband distribution, mobility and interactivity.
"These proposals set out what we believe is required to fulfil a vision of diverse, vibrant and engaging public service broadcasting content across a range of digital media."
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