The BBC should cut down on output that does not fit with its central role of being a public service broadcaster, the government has said.
Ms Jowell said the licence fee was still the "default option" for funding
Culture Secretary Tessa Jowell said some new services should come under "very close scrutiny" as the BBC's royal charter comes up for review.
She did not give specific examples, but gave support to digital TV channels.
Ms Jowell also said the BBC governors must be overhauled, calling the current situation "unacceptable".
A new BBC charter, which sets out the corporation's role, function, structure and funding, must be drawn up to come into force at the start of 2007.
"I think this charter review needs to provide a sharper definition of the BBC's role and purpose, and to allow the BBC to flourish within that sharper definition of its role and purpose," Ms Jowell said.
"Some of the diversity of the functions the BBC has developed over the last 10 years should now come under very close scrutiny," she told the House of Commons Culture, Media and Sport Committee.
Michael Grade (left) and Mark Thompson are in charge of the BBC
Ms Jowell said she thought BBC chairman Michael Grade and director general Mark Thompson shared her views.
Mr Grade and Mr Thompson have already placed more emphasis on making output meet the BBC's public value test.
This means services must prove they fill four key criteria - quality, impact, audience reach and value for money.
Ms Jowell described the current dual role of the BBC governors - the 12 people who act as both champions and regulators of the corporation - as "unsustainable".
The governors were "probably the most fundamental area for reform" in the charter review, she told MPs.
The governors were criticised in the wake of the Hutton Report for being too close to BBC managers.
Mr Grade has said one of the BBC's priorities will be a clear separation between the role of the governors and the BBC management.
"The BBC has recognised the unsustainability of this dual function," Ms Jowell said.
"Just as the BBC has made very welcome moves to achieve this separation, it's fair to say we wouldn't regard the status quo as an option that would be acceptable and sustainable for the next charter review."
She said there were no firm decisions on any changes, but she had a "very good idea" about a range of options.
There should be a greater connection between governors and the public, she said.
"There should be a line of accountability that keeps the BBC honest and keeps it true to the purposes and functions it has for which the licence fee is paid."
A BBC spokesperson said the governors welcomed Ms Jowell's support for "the changes to the BBC's governance system they announced in June".
"The changes currently being implemented address that point and, once
completed, will strengthen the BBC's accountability to licence payers," the spokesperson added.
Ms Jowell also said the licence fee remained the "default option" for funding the corporation, she said, and would only be replaced if a better choice was found.
BBC Four praised
"That said, we're certainly looking at alternatives and have not yet reached any final view," she said.
She also said she expected digital channels catering for minority audiences to become increasingly successful.
BBC Four was praised for being "extremely popular" among its fans, while BBC Three faced a greater challenge and needed "rather longer to develop".
Both digital channels were recently criticised for being poor value for money by a government-backed report.
"I think the future will see the growth of niche channels rather than the continued growth of mixed-genre channels," she said.
Ms Jowell warned against the BBC reducing its range of programmes, saying arts and religion shows should remain even if they do not get huge viewing figures.