British films will have bigger budgets - but fewer of them will be made - in the most radical shake-up of the industry in a generation.

The Film Council, which will be launched this morning by the culture secretary, Chris Smith, and the film director, Alan Parker, is to steer filmmakers towards making commercial movies which will be able to compete head-to-head with Hollywood.

With little more than half of the 110 films made in the UK last year ever likely to be seen in cinemas, what Mr Parker - who directed such hits as The Commitments and Bugsy Malone - has created is a powerful, hard-nosed, semi-state talent factory which will be able to pick winners and be unafraid of getting into bed with American studios.

Nearly half the council's £22m will be used to back "popular, mainstream films" - the sort which Mr Parker and fellow board member Duncan Kenworthy, who produced Four Weddings and a Funeral, tend to make, and which the public flock to the multiplexes to see. A further £4.2m will go towards European co-productions, which again is likely to be tilted towards out-and-out commercial projects.

A £5m New Cinema Fund will back more radical films, although even here the council expects the odd offbeat hit. "No one wants to make films that are only seen by the filmmakers, their families and the crew," said Mr Kenworthy. "We are about building a sustainable industry that can stand on its own feet."

The major shift of emphasis, however, is that a quarter of the budget will be spent on developing screenplays and training writers, an area in which the British industry has a woeful record.

One of the main criticisms of the previous lottery system was that films rushed into production without sufficient work on their scripts in order to qualify for lottery money.

With less than a tenth of the £105m doled out by the lottery so far recouped from successful films, something had to be done.

Although the deluge of cash sparked a boom in filmmaking, the lottery will be more remembered for turkeys like Rancid Aluminium and The Secret Laughter of Women.

There were notable successes - Lynne Ramsay's Rat catcher might never have been made without it - but its main legacy is a glut of mundane £3m films, many made without an audience in mind.

Mr Kenworthy, whose production arm DNA is one of three separate, and so far more successful mini-studios set up by the lottery, said that there was an imbalance in the British industry, with too many low-budget films. "One of the truisms of the film business is that the more money a film costs the more it is likely to make."

John Woodward, chief executive, said the new council would not be hamstrung by the arcane rules which restricted the Arts Council's lottery film board to giving money to productions that would not otherwise be made.

The lottery principle of "additionality" - which in effect filtered out those films that stood a chance of making money, by insisting that lottery funds should be in addition to existing public spending - was the first thing to go when the council was first mooted by Mr Smith.

Mr Woodward said the council wanted to be in at the beginning of projects where it could exercise the most leverage from its initial investment.

Mr Parker, the chairman, said the key was to bring on screenwriters and industry executives.

"The measures we are announcing are geared to specific priorities which must be addressed if we want the basis for a real industry producing stronger films."

Lottery losers at box office

• Stephen Poliakoff's Food of Love cost £2.1m to make (£800,000 from the lottery) but made only £1,507 at the box office.

• The Secret Laughter of Women, starring Colin Firth, cost £3.3m but took just £2,832 after getting a lottery of grant of just less than £1m.

• Los Angeles Without a Map cost £4.9m - £870,000 of which was from the lottery - but took only £ 3,641 here.

• The Last Yellow got a £500,000 lottery grant but took less than £5,000 at the box office.

• A Kind of Hush created a kind of hush by taking £5,800 despite a lottery investment of £750,000.

• The Slab Boys made £16,000 from £500,000 given by the Scottish Arts Council.