The Education Secretary, David Blunkett, said they had to compete globally - the "do nothing" university would not survive.

In a speech on higher education in the 21st century, Mr Blunkett said: "The arrival of the knowledge economy has intensified the competitive pressures on higher education institutions.

"Learning has become big business. So a new national initiative is needed to maximise Britain's chances of success in this global environment."

The US already has some very big and successful operations going on, and we don't want to be behind in the game Hefce spokesman

The Higher Education Funding Council for England (Hefce) would bring forward proposals for the new "virtual" venture.

"We want to create a new partnership between universities and the private sector which will develop a novel means of distance learning and exploit new technologies," Mr Blunkett said.

Steering group

"It will concentrate resources from a number of partners on a scale which can compete with leading US providers."

Some universities have not waited to be told: Leeds, Sheffield, York and Southampton have formed a partnership with four major American universities to take advantage of the growing global markets in teaching and research - the University of California at San Diego, Pennsylvania State University, the University of Washington and the University of Wisconsin-Madison.

They plan to produce common software for courses, establish joint PhD supervision and develop common benchmarking standards.

They are focusing on nine areas initially in which they already excel, including environmental technology, systems engineering, knowledge management, bioinformatics and public policy.

Working on it

Details of the Hefce initiative have yet to be developed. A steering group, including members of the UK's three other higher education funding bodies, the Higher Education Funding Council for Wales, the Higher Education Funding Council for Scotland, and the Department of Education Northern Ireland, has been set up to look into the scheme.

E-university students would not have to set foot in lecture theatres

But it is expected that the e-university would operate by offering degree courses from a number of UK universities through a central body - it would not be a new, self-standing institution.

Students would be able to access lecture and study material in a variety of forms over the internet, and demand would dictate which courses and degrees were offered.

It is expected that the main market for online study in this way would be overseas students, but it is hoped it would also attract a smaller number of UK students unable to attend universities because of work commitments and other restraints.

Foreign students currently earn UK universities �700m. The Prime Minister, Tony Blair, has set universities a target to increase their market share by a quarter by 2005, against competition from the US, Canada and Australia.

Funding

A Hefce spokesman said: "Overseas students are a very important market. This is a way of giving the UK an exciting high profile in the education of overseas students using the web.

"Adults interested in professional development don't have time to attend universities if they are in full-time work. This would be much more flexible.

"It is less likely to attract the average school leaver who would usually do a traditional three-year degree course."

Hefce is to ask the government for money - the figure is expected to be about �50m - to start up the e-university, which, once operating, would be funded by tuition fees.

The funding body is due to contact higher education institutions in the UK, some of which already have online study facilities, asking them for feedback on the plans.

It is hoped the e-university will meet the challenge of US universities like the Massachusetts Institute of Technology, and Stanford in California, which offer virtual degrees.

The Hefce spokesman said: "We feel it is important to move fast. One of the reasons for doing this is because we've realised the US already has some very big and successful operations going on, and we don't want to be behind in the game."