Plans for a new "landscape of local TV services" in the UK would help "strengthen local democracy", Culture Secretary Jeremy Hunt has said.
"We need to do something to stimulate investment in new media services that give a proper voice to local people," he told BBC Radio 4's Today Programme.
He said ownership restrictions would be lifted on local papers, TV and radio.
But BBC Director General Mark Thompson said that "market impact" issues might limit the corporation's involvement.
In his speech to the Royal Television Society international conference in London, Mr Hunt said he was "strongly encouraged by the serious thought that the BBC has been giving to how it might partner with new local media providers".
But at the same event, Mr Thompson reiterated an earlier announcement that the BBC would "not go more local in television and the web than we are now".
Almost two years ago, the BBC Trust refused a BBC management proposal to invest £68m in a network of local video news websites.
It said the idea "would not improve services for the public enough to justify either the investment of licence fee funds or the negative impact on commercial media".
Reacting to Mr Hunt's speech on Wednesday, Mr Thompson said the government's proposals were still in "early stages" but that the corporation could provide some facilities and training to local media services.
In a previous speech, Mr Hunt had questioned why local television could work in Birmingham, Alabama but not Birmingham in the West Midlands.
'Additional revenue sources'
Nicholas Shott, of investment bankers Lazard, was commissioned by Mr Hunt's department to investigate the local TV proposals.
His interim report said advertising alone would not be enough to support the stations and corporate sponsorship could be considered.
Barclays' backing of the London bicycle scheme was cited as an example of how sponsorship could work.
In a letter to Mr Hunt, Mr Shott said the TV stations were more likely to succeed in urban areas, but even there "the economics of a TV business funded mainly by advertising will still be challenging" and "additional revenue sources" would have to be explored.
In his speech, Mr Hunt set out his vision of the local TV services, broadcasting via digital TV or broadband, and free to link up with each other to cut costs and appeal to national advertisers.
BBC media correspondent Torin Douglas says Mr Hunt has long believed British TV is too centralised, lacking the local stations found in the US and mainland Europe.
Mr Hunt has not convinced most media executives, who doubt local TV can flourish here, particularly since the recent slump in advertising, our correspondent says.
But the minister is said to think future generations will find the idea that the UK cannot sustain local TV "quaint".
"Yesterday I met Jeff Bewkes, the chief executive of Time Warner, and he said that in the US, his TV channels only get 50% of their revenue from advertising, they get a lot of it from the fees they receive from cable companies."
He added that, in other countries, a lot of income for local TV cable companies comes from "local sports sponsorship rights".