BBC One drama is to receive a £30m boost from the closure of BBC Three as a TV channel, director general Tony Hall has announced.
He confirmed BBC Three would be moved to the iPlayer in autumn 2015, with its budget slashed from £85m to £25m.
Lord Hall said moving the channel online was "the right thing to do" and also "financially necessary".
The proposal will create space for a BBC One +1 service and a one-hour evening extension of CBBC to 2000 GMT.
"I want younger and less affluent audiences to be better served by the BBC. Younger audiences are increasingly moving online and on demand. The challenge is to take the brilliance of BBC Three into that world," he said.
The director general said "tough decisions" needed to be made to face up to the fiscal challenges of the BBC, but said the plan was "strategically right and financially right too".
He stressed that cuts were necessary because the licence fee had not increased, while the BBC was "absorbing extra costs" for running the World Service and S4C.
Lord Hall said he was "not prepared to compromise on the quality of what I think is at the heart of the BBC, and that is drama", adding he had noticed BBC One's drama budget was in need of a boost.
Meanwhile, director of television Danny Cohen said he could not guarantee the future of BBC Four.
He told Radio 5 live: "The honest answer to that is 'no, we can't say for certain what will happen to BBC Four in the future'.
"If future funding for the BBC comes under more threat, we will have to take more services along a similar route."
BBC Three in numbers
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£85m on programmes
6.6p per hour for each viewer
The proposals for BBC Three have been endorsed by the corporation's executive board but the BBC Trust, which represents the interests of licence fee payers, will carry out a full consultation before giving its stamp of approval.
A Trust spokesman said: "In this case, we expect to conduct a public value test, including a public consultation, so licence fee payers will have the opportunity to have their say in the process."
BBC Three branding will remain on its offerings on the iPlayer, Lord Hall added, while some shows will eventually be shown on BBC One or Two.
He admitted this was the first time the BBC had ever proposed closing a TV channel - and warned he could not "rule out it being the last change to our programmes or services".
Former BBC Three controller Mr Cohen said in an ideal world "we would not be making this move for a few more years".
He added: "Given an entirely free hand, I would make this change in about four or five years' time, using the years between now and then to slowly shift the balance between linear and on-demand BBC Three content.
"That would be a safer, less risky strategy. But we don't have the choice to wait and do that due to the investments we need to make."
The BBC's media correspondent David Sillito said: "The detail is yet to be worked out. They're going to hang onto the brand, but it won't be a channel.
"It's going to be a much, much smaller output than people are used to. In essence there's less money for experimental comedy in order to protect drama on BBC One. "
Celebrity supporters of the channel, which has been the test bed for many successful comedy shows, have expressed their dismay at plans.
Matt Lucas, who launched Little Britain on BBC Three said the move would be "really bad for new comedy".
Gavin and Stacey's Ruth Jones said she was "really shocked", saying the station had "a special place in her heart."
She added: "However, I'm not an accountant and, I don't know, there's obviously reasons for it. People aren't just doing it for the benefit of their health, are they?"
Viewers have already started online petitions to save the channel in its current form, with one mustering the support of more than 60,000 people by Thursday lunchtime.
Some of them took part in a special Radio 1 programme, where listeners expressed their anger to Cohen.
"I'm completely gutted, I think you're completely ignoring our views," said BBC Three fan Alice. "We're not going to sit by and take it - we're going to make a stand and try to save the channel."
Another viewer, Michael, added: "Me and my fiance are not very techy people. We live busy lifestyles and BBC Three is on at a convenient time - if it goes online we just simply won't watch it."
But a third audience member, Lewis, said he thought moving the channel online made sense.
"We know how to use things online. I think it's the older generations who are going to struggle if, say, BBC Four or a radio channel was cut.
"This the best of the worst situation," he added.
Cohen said he found the cut "painful" and as a former BBC Three controller, was "very focused" on its target audience.
"All those shows you love and like on BBC Three - once they've been online we're going to repeat them," he said.
"We'll put them on around 22:35 on BBC One when more people watch [that channel] than BBC Three. We'll make sure all those great comedies appear on BBC One and Two as well."