BT will legally separate itself from Openreach, which is responsible for the UK's broadband infrastructure, in a move designed to allow all internet providers to better meet customers' demands.
There has been growing pressure on the telecoms giant to allow the network to be opened up to rivals so they connect directly to homes and offices with their own fibre networks.
BT Group will still own Openreach, but it will become a distinct company with its own board, strategy and branding, with 32,000 employees transferring to work for the newly-formed Openreach Limited.
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.
Under the current arrangement, there was concern BT has too much control over Openreach's decisions while rivals such as Vodafone, Sky and TalkTalk, who use the network, complained they were not consulted sufficiently on plans that affect them.
Other telecoms companies will now be consulted on major decisions, which Sky and TalkTalk said would benefit customers.
TalkTalk CEO Dido Harding said: "The new company will be better placed to deliver the improved investment and service that consumers and businesses deserve.
"This deal will require robust Ofcom monitoring and enforcement to ensure it delivers the improvements the regulator expects.
"We hope this is the start of a new deal for Britain’s broadband customers, who will be keen to see a clear timetable from Openreach setting out when their services will improve.”
A Sky spokesperson said: "A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs."
Virgin Media was more dismissive of the switch, however, with CEO Tom Mockridge saying: “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.”
Ofcom had threatened to impose a legal separation through regulation, but it said this was no longer necessary as BT had addressed its competition concerns.
Ofcom boss Sharon White called it a "significant day" for phone and broadband users and pledged to "carefully monitor" how the new Openreach performs.
Under the agreement, the Openreach chief executive will report to the Openreach chairman, with accountability to the BT Group chief executive.
Gavin Patterson, BT chief executive, 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."
The reforms have been designed to be implemented this year.
Ofcom said it will publish more detail on how the agreement will address competition concerns shortly.