Universities face their biggest challenge in 35 years as the government this week opened the door to institutional diversity, vocational foundation degrees, e-universities and differentiated tuition fees.

Education secretary David Blunkett's speech, at the University of Greenwich on Tuesday, echoed an address by Tony Crosland in 1965, at what was then Woolwich Polytechnic.

Mr Blunkett's speech was the unequivocal acknowledgement that the ÖйúAƬ sector is, and should be, highly stratified.

It promises to end the aim, fostered by the abolition of the university/polytechnic binary divide in 1992, that all universities should offer the same type of education and pursue the same goals.

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In a second speech, to the Further Education Funding Council on Wednesday, Mr Blunkett unveiled a raft of reforms to further education qualifications, including a vocational A level. The aim is to create a seamless, robust vocational qualifications structure that enjoys parity of esteem with its academic counterpart.

Mr Blunkett used his Greenwich speech to stress that a unitary ÖйúAƬ system did not mean uniformity. He urged universities to embrace their diversity in order to become more competitive and responsive to learner and employer needs.

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"The system must now evolve greater diversity, so that there is effective responsiveness from the local through to the global. The critical issue is that universities define their missions and pursue them with vigour," he said. This could lead to the emergence of three tiers of ÖйúAƬ - research universities, regional universities and community colleges.

Mr Blunkett reinforced his message by signalling the possible relaxation of regulations that prevent universities charging undergraduate tuition fees above those set by the government. He posed the question: "How much expansion can we afford?" He said there was a need for "an honest debate" on the future funding of ÖйúAƬ after the next general election. But Mr Blunkett said that there would be no top-up fees while he was secretary of state.

Mr Blunkett said that elite research universities could not hope to charge the same sort of fees as the Ivy League institutions in the United States. They lack the massive financial reserves that make it possible for institutions such as Harvard University to charge very high fees and support a large number of scholarships.

Howard Newby, president of the Committee of Vice-Chancellors and Principals, believes that the funding debate should be held as part of a larger Dearing-style review in two years. The CVCP is to discuss differentiated fees at its residential meeting in a fortnight.

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Mr Blunkett's announcement of e-universities offers further scope for stratification. Bids have been invited for a consortium of institutions to link with the private sector to offer degrees online to overseas students. Some feel that if this group is to be an effective showcase for UK ÖйúAƬ then it should comprise the "top" universities.

Mr Blunkett said that he was happy with the present research funding system because it concentrates money in the big research universities and so fosters excellence. But he gave his guarantee that weaker research universities would not be squeezed out of research and that funding would support excellence wherever it is found.

Non-research intensive universities can capitalise via the foundation degrees. While Mr Blunkett wants old and new universities to offer them, in partnership with colleges and employers, the reality is that new universities' missions will be far more in tune with their widening participation aims.

The government also sees non-research universities playing a significant role at regional and sub-regional level. They are being encouraged to develop links with employers, to carry out applied research and develop research commerically, to offer professional development courses and to progress the widening participation agenda.

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All universities will be expected to realise the full potential of new communications technologies amid government concern that they have been slower than the private sector to adapt. Mr Blunkett sees the development of these technologies as essential to keeping costs down in the face of continued ÖйúAƬ expansion and limited public funding.

He said: "Higher education in this century will need to look very different from the system that evolved in the second half of the 20th century. It will be of mixed mode - delivering through ICT and other learning at a distance, as well as face to face."

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* Careers advice is to be improved for students and potential students to help them through the range of qualifications and career options available in a post-16 education system. Mr Blunkett has asked universities to arrange more work experience for undergraduates.