The UK's Channel 4 yesterday confirmed that it is to close FilmFour. It is planning to replace the $46.1m (£30m) a year vertically-integrated film division with an in-house development and production operation with an annual budget of around $15.4m (£10m). FilmFour was the UK's larfgest single film financier and was arguably the UK's most significant film company.

The dramatically scaled back venture is expected to operate similarly to the film arm of UK public broadcaster the BBC, which has a core film investment of $15.4m (£10m) a year and where, until recently, newly-installed Channel 4 chief Mark Thompson was number two.

Along with slashing Channel 4's annual investment, the move will mean redundancy for most of FilmFour's 60 staff; axing UK distribution and international sales as well as selling off FilmFour's central London offices.

To be based at the channel's Horseferry Road headquarters, the new venture is expected to license UK TV rights and possibly provide equity - leaving producers to raise the rest of the budget.

The annual $15.4m budget is expected to include a development fund of around $1.5m (£1m), a third of FilmFour's current development spend of around $4.6m (£3m). Also likely to be included in the $15.4m are overheads of around $1.5m a year. By contrast, FilmFour had overheads of around $9.2m (£6m).

Channel 4's board was still meeting at press time late on Monday to ratify the move, which some observers see as the minimum commitment to film it can make without breaching its charter.

Low-budget arm FilmFour Lab, which has a funding partnership with support body the Film Council, is expected to survive with its annual budget of about $2.5m (£1.6m) intact over and above the $15.4m figure.

FilmFour chief executive Paul Webster is expected to leave the channel, although he may oversee the winding down.

Details on the new operation remain worryingly sketchy - leading one producer to question how serious the channel is about film. The aim seems to be to try to emulate Channel 4's original strategy when it launched 20 years ago, backing low budget films made for TV such as My Beautiful Laundrette and Letter To Brezhnev.

Under drama head David Rose, who first oversaw film before David Aukin took over, average budgets were around $461,200 (£300,000), a sum few can imagine making films for now.

The impact on the UK film industry would still be severe. The only UK-owned companies investing comparable amounts in local production are the three lottery franchises, which are set to expire late next year.

"It's a real shame, it leaves a big gap in the market," said Barnaby Thompson, who produced Lucky Break for FilmFour. "It means we don't have a significant, UK-centric film company. That is depressing."

Producer Andrew Eaton said he had not been told whether Stephen Fry's highly-anticipated Bright Young Things, starring Judi Dench, would still go ahead with its planned shoot in October. "It's got a budget of $12.3m (£8m) so I would have thought it is unlikely," he said.

Upcoming projects that are most likely to avoid the axe include Edgardo Mortara, starring Anthony Hopkins and Javier Bardem, and Walter Salles' The Motorcycle Diaries.

But scripts in earlier stages of development - even ones from the cream of new UK filmmakers such as Lynne Ramsay's The Lovely Bones and Jonathan Glazer's Under The Skin - face greater uncertainty. Large-scale titles such as Paul Verhoeven's Batavia's Graveyard appear impossible on such a tight budget.