The Learning and Skills Council is to be axed by 2010, with local authorities picking up responsibility for the new diplomas and apprenticeships alongside GCSEs and A levels.
The government made the proposals in a White Paper which details the transfer of £7billion to local authorities to help colleges and sixth forms deliver the reforms needed to raise the education and training leaving age to 18.
A new agency will be formed, with a further £4billion a year, to provide training and skills for adults.
Ed Balls, secretary of state for children, schools and families commented: "We want every 16 and 17 year old in the country to stay on in education or training so that they get a better job, have the chance to earn more and can make the most of their talents. Local Authorities will play a key role in making this happen.
"Local Authorities are in the best place to respond to the needs of young people locally. So by giving them responsibility for the funding we are putting the final pieces in place to ensure they can offer this choice. They are already responsible for schools, are taking
responsibility for advising young people and are being given new duties to ensure that the right range of provision is in place for young people to continue in education and training until 19.
"We are committed to revolutionising the education system so that it delivers for all young people whatever their interests or abilities. There must be something available for everyone, whichever part of the country they live in. We are confident that young people will want to take full advantage of the exciting choices available to them."
For adult learners a new smaller agency will replace the LSC to streamline the funding process to colleges and training providers. This will ensure that funding follows the training needs of employers and learners.
John Denham, secretary of state for innovation, universities and skills added: "We want every adult to have the opportunity to improve their skills to get a job or progress in work and to help them realise their own aspirations and talents. The proposals in today's consultation paper will help us to build on the great success of the LSC who are currently taking forward the skills agenda.
"If we are to meet the targets we set out in World Class Skills then we need a FE and skills system which is even more flexible and responsive to both learners and employers. The new Skills Funding Agency will ensure that government funding responds to employer's and adults' skills needs and supports excellence in the FE sector."
Commenting on the consultation, TUC general secretary Brendan Barber said: "Many of the proposed reforms, such as giving local authorities a greater strategic role for young people, should help more employees get the skills they need. But with two in five workers still not getting any regular training at work, this organisational reform must not divert attention from the wider skills challenge - getting more employers to offer quality apprenticeships and training opportunities.
"It's vital that as well as meeting the skills needs of employers, more individual employees are helped to get new skills under these new arrangements. Unions can help to do this, both at a strategic level and on the ground, through the 18,000-strong network of union learning reps.
"The Learning and Skills Council (LSC) has played an important role in supporting the government's skills strategy in recent years. Ministers must ensure that the expertise built up by LSC staff is utilised in any future arrangements, without recourse to redundancies."