The company has announced content deals with BBC Worldwide, Paramount and Warner Music Group to provide film, music and other TV programming over VOD, on top of what consumers can currently receive on the DTT platform.
The service, which will have its own EPG and PVR, will work via a broadband connection to a set-top box, expected to cost about £80, when it launches in the autumn. BT has yet to unveil its pricing strategy, but is expected to offer existing DTT platform content for the same monthly charge as its BT Bradband service.
Users will be able to pay per view or pay subscription to receive "potential thousands" of other VOD programmes.
BT's announcement came in a big week for the future of TV platforms, with NTL announcing plans for a possible merger with Virgin Mobile (analysis, page 16) and the last figures from Ofcom showing a huge uptake in the Freeview platform.
Although it is starting from scratch in the TV market, Ian Livingston, chief executive officer of BT Retail, said the company was "defining next generation TV".
He added: "A partnership between the country's leading communications company and three of the world's leading entertainment groups is great news for consumers in the UK."
John Smith, CEO of BBC Worldwide, said that VOD was "rapidly shaping the future of television."
Warner said it plans to use BT's proposition as part of its strategy to become a multifaceted, global music content company, while Paramount will offer both pay-per-view for its most recent films and free-to-view on-demand movies as part of the deal.
BT's move is another boost for the Government in its move towards digital switchover, following the release of the latest figures from Ofcom, suggesting more than two thirds of UK households now have access to digital TV.
Freeview was by far the biggest driver, with more than one million Freeview set-top boxes sold in the quarter, compared to the 660,000 sales for the corresponding period in 2004.
Sky, in contrast, saw its subscriber base grow by 48,000, with digital cable subscribers up by just over 43,000.