UK satellite broadcaster BSkyB is axing Sky Pictures, the prolific film production arm that was out to challenge Channel 4 and the BBC's established feature operations.

A spokesperson said on Thursday that the broadcasting giant expected to close the division within months. Sky Pictures' 17 staff were told this week that the operation would be shut within a time frame that would be decided after consulting them.

The spokesperson said that the closure was part of a strategic move to "maximise revenues and minimise costs", noting that news service Sky News had recently shed staff.

The broadcaster has long been viewed as having an equivocal policy towards film production, originally aiming to premiere films on TV but then backtracking when producers protested.

But the move will come as a particularly bitter blow to Sky Pictures staff and the local film industry. Sky Pictures had been making its presence felt in recent months with a number of deals and appeared to have weathered the departure of Sky Networks managing director Elisabeth Murdoch, a strong advocate of original programming at the broadcaster.

Only yesterday, Sky Pictures and Pathe's UK arm unveiled a production and distribution deal covering up to eight films over two years. Sky Pictures is now expected to continue as a brand for films from the Pathe deal. Projects are expected to be generated by Pathe but selected jointly, with Pathe handling distribution in the UK, France, Benelux and Switzerland, as well as international sales. The first two films in the deal are Peter Hewitt's Thunderpants and Simon Cellan Jones' The One And Only.

"Our relationship with Pathe is one route for future investment in film production," said the spokesperson.

Sky Pictures head William Turner is expected to continue managing film production activities, although the spokesperson declined to comment on whether Turner would stay on a permanent basis or just while Sky Pictures was being wound down.

The spokesperson stressed that Sky remained committed to projects that had already been greenlit. But he declined to comment on which titles those were, or the closure's impact on Sky Pictures' recent deal with Momentum Pictures. Sky Pictures and Momentum finalised a co-production and acquisition partnership last month to pre-buy all UK rights to up to 10 films over the next two years.

Apparently unaware of the broadcaster's imminent strategy shift, Sky Pictures was boarding further projects as recently as last month. At Cannes, the operation unveiled a development deal for $8m comedy Accidentally On Purpose with Manifest Pictures, the production shingle of Lisa Henson, Janet Yang and Naomi Despre.

In August last year, Sky Pictures bolstered its staff, appointing Emma Berkofsky and Chris Brock to the newly-created roles of head of development and senior business and legal affairs executive respectively.

Best known for Fine Line Features acquisition Saving Grace, Sky Pictures boarded recent productions such as The Fourth Angel, starring Jeremy Irons and Forest Whitaker, My Kingdom, directed by Don Boyd, and Ibiza comedy Is Harry On The Boat'. The operation backed some 12 films a year, a third of which were made for TV in the UK.