Dyke, who has been criticised for the way he runs the BBC on commercial lines, stated that it was necessary for ITV to continue to be a powerful force in British TV.
Delivering the Richard Dunn lecture, he said: "A healthy broadcasting market in the UK needs a third gorilla alongside the BBC and Sky and that third gorilla should be an advertiser-funded, free-to-air television group with ITV at its heart."
The ITV companies pay the Treasury more than £300 million a year for their licences to broadcast, which were allocated at the start of the 90s.
However, Dyke said the Treasury should recognise ITV is no longer a cash cow and that the fee it pays is unreasonable if ITV is to remain a public service broadcaster.
Dyke used his lecture, named in memory of the former Thames TV executive, to criticise the ITV management for the state of the network. "Some senior people in ITV have blamed the BBC for its plight. My answer to that is they should look much closer to home for many of the reasons for ITV's recent failures," he said.
Among the list of poor management decisions, Dyke cited the £1.2 billion invested in the now-defunct ITV Digital, the amount paid for sports rights for the doomed ITV Sports channel, the 10 per cent of the network's budget spent on Premier League highlights and the loss of Home & Away to five.
Dyke called on the trade and industry secretary, Patricia Hewitt, to approve the merger of Carlton and Granada in order to repair some of the damage done to ITV. "If my analysis of ITV is right, then it must be in the interests of both our broadcasting system and its audiences for the merger to be allowed to go ahead and for further consolidation within advertising-funded broadcasting to be allowed," Dyke said.