The telecoms regulator says BT has agreed to a "legal separation" of its Openreach division, in a move aimed at addressing competition concerns.
Ofcom said the deal - which stops short of a full split - meant the company's infrastructure unit will become a "distinct, legally separate company with its own board, within the BT Group (Other OTC: BTGOF - news) ".
It goes some way to addressing the demands of BT's rivals, including Sky PLC (Frankfurt: 893517 - news) - the owner of Sky News - which claim Openreach favours BT's own retail business and harms their customers' interests as a result.
They had called for a full split on competition grounds.
Openreach builds and maintains the tens of millions of copper and fibre lines that run from telephone exchanges to homes and businesses across the UK.
BT and its competitors rely on these to service their business and domestic customers.
Ofcom, which had demanded the separation in November , said while Openreach would remain part of the BT Group it would have a separate board and brand identity from BT, though its chief executive and chairman would be accountable to BT's boss in some areas.
It expected 32,000 staff to formally transfer to Openreach later this year once consultation processes and pension arrangements had been completed.
The head of Ofcom, Sharon White, warned the watchdog would "carefully monitor" performance once the separation took place.
BT chief executive, Gavin Patterson, said: "I believe this agreement will serve the long-term interests of millions of UK households, businesses and service providers that rely on our infrastructure.
"It will also end a period of uncertainty for our people and support further investment in the UK's digital infrastructure.
"We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future."
However, Virgin Media was not so sure.
Its chief executive, Tom Mockridge, said: "Openreach is just the same old snail's paced network with a new shell.
"Call it what you like but it's still BT, four times slower than Virgin Media."
A Sky spokesperson said: "This is a welcome step that we have long called for on behalf of our customers.
"A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs.
"It's important that today's agreement is now implemented by BT in good faith and without delay."
However, the Communication Workers Union warned it might take some time.
Its deputy general secretary, Andy Kerr, said: "It is vitally important that our members in the BT pension scheme are fully protected and their pension benefits are not affected.
"In addition, we will be doing all we can to ensure that our Openreach members' terms and conditions and job security are fully protected."
BT shares rose 3.7% on the FTSE 100 in what was largely seen as a relief rally.