The move means that digital television becomes a realistic option to those 27 per cent of households that do not want to pay to receive digital TV and cannot receive a signal via digital terrestrial. It also marks an end to Sky's policy of only offering a premium pay-TV service.
Sky has decided to go it alone in offering the service, snubbing an offer by the BBC to work on a joint "free sat" product. However, Andy Duncan, the chairman of Freeview, said the BBC welcomed Sky's decision as good for the BBC's viewers.
Sky's free-to-air service will be available for a one-off charge of £150 that covers the cost of the equipment and the installation fees.
With 81 radio stations and 116 TV channels on offer, it will transmit all of the existing free-to-air channels, such as the BBC's portfolio of digital channels and ITV1 and ITV2, as well as scores of minority interest channels such as Reality TV and Islam TV.
Although there is no monthly subscription fee, there is an upgrade option for viewers who subsequently decide to add Sky's premium television services.
The digibox will contain an integrated modem, meaning interactive services and advertising will also be available.
James Murdoch, the chief executive of BSkyB, said: "These initiatives are another step in giving consumers a choice from Sky that suits their needs at the top and lower ends of the scale. They will help drive greater take-up of digital TV services and enable Sky to enjoy a close relationship with more customers."