Some Welsh universities are to face closure, Education Minister Leighton Andrews has announced.
He indicated smaller bodies will be forced into mergers, meaning a smaller number of larger and stronger ones.
There would be "significantly fewer" Higher Education (HE) institutions by 2013, which would not mean fewer students, but fewer vice-chancellors.
Tory AM David Melding called it one of the most significant announcements by an assembly government minister.
Mr Melding said: "I'm not sure whether I am in shock or awe".
Mr Andrews said the changes would free funding to be more closely directed to government priorities and economic development.
The minister told Assembly Members: "Wales has been dogged for years by many institutions which are too small to cut a mark internationally, too small to withstand and respond to the growing pressure of international competition, and in danger of wasting resources competing with neighbours rather than looking out from Wales to win reputation and research income."
He said: "This target does not mean fewer students. But it is likely to mean fewer vice-chancellors.
"We will have significantly fewer HE institutions in Wales but they will be larger and stronger. HEFCW will work with HE institutions to achieve this smoothly and rapidly with my full backing and that of the cabinet."
The Higher Education Action Plan was approved last week by the cabinet.
This year the Higher Education Funding Council for Wales is to devise a new method of funding research from 2011/12 which will support a sharper focus on areas of national priority so Welsh universities and colleges are better placed to compete for research funds with other institutions in the UK.
Mr Andrews said he expected this would lead to a knock-on effect of more international students coming to Wales to study.
Welsh Liberal Democrat shadow education minister Jenny Randerson said she feared the restructure was about centralisation rather than democratisation.
She said: "The biggest effect of this long held plan by the minister is the disappearance of most of our smaller HE institutions.
"While I fully accept the need for the sector to adapt to rapidly changing circumstances, I do not believe that bigger is always better: neither in what they offer to students, nor in their international reputations. Often collaboration, not merger is the best route to international success.
"The minister is right to want to encourage more students from poorer backgrounds, but if they have no choice of institutions or courses in their local area, then he is also taking massive opportunity away from them."