Chancellor George Osborne (pictured, Reuters) wants the BBC "to be the national broadcaster without being a monopoly broadcaster".
The Conservative MP said the corporation needs to make sure it is not "suffocating local news".
He also said the BBC should make sure it reflects "the diversity of opinion in our country" and doesn't "become too mono-culture".
In an interview with Radio Times, the Chancellor also signalled that he favours the handover of BBC regulation from the BBC Trust to independent watchdog Ofcom.
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The BBC Trust was established in 2007, taking on the responsibilities formerly exercised by the board of governors for setting a strategic direction for the BBC and exercising oversight of its work in the interests of licence fee payers.
But Trust chairman Rona Fairhead said last month that it should be abolished and replaced by a new external regulator and a stronger board.
Osborne said: "The Trust arrangement has never really worked. I've never understood why the BBC is so frightened of regulation by Ofcom.
"It's not as if ITV is poorly regulated. Ofcom has proved itself to be a robust regulator."
Renegotiation of the BBC's Royal Charter will follow the 7 May general election. Asked whether the BBC – whose Royal Charter comes up for renewal at the end of 2016 – can expect further reforms if Tories win the election, Osborne said: "The BBC needs to be the national broadcaster without being a monopoly broadcaster.
"I think one of the things the BBC has to look out for is not suffocating local news (from other outlets) and making sure they reflect the diversity of opinion in our country and don't become too mono-culture.
"There are plenty of people on (Radio 4's) Today programme defending every line of government spending. But when do you hear people saying, 'This comes from my taxes and I don't want to spend more tax'?"
On the question of whether the licence fee would be retained, Osborne said: "We certainly don't plan to replace it, but we need to look at all the options."
In response to Osborne's interview, The Times's editorial today accused the BBC of having "parked its tanks on local newspapers' front lawns" and said it should "withdraw".
The editorial, headlined Website Imperialism, said: "The… solution is to remind the BBC that it is, by charter, a broadcaster and not an online newspaper.
"It has every right to post its TV and radio bulletins online, local as well as national, but it has no business duplicating the efforts of commercial local outlets fighting for their lives.
"Local papers are the best source of genuine diversity in news. The BBC should not be smothering it."
A BBC spokesperson said: “We welcome the Chancellor’s comments about the BBC’s future as a national broadcaster funded by the licence fee.”
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