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The move could trigger a price war in the digital television market as BSkyB and its main rival, ONdigital, fight it out to win new subscribers.
BSkyB's announcement came amid reports that ONdigital, a joint venture between ITV companies Carlton and Granada, was also planning to give away free set-top boxes to new subscribers from this weekend.
BSkyB plans to offer the free set top boxes from June. At the moment the boxes sell for around £200 each. Subscribers will just pay a £40 installation fee.
And the UK's leading cable company, Cable and Wireless Communications, also said it would roll out new digital services in the next year.
The group plans to invest £60m over the next twelve months.
CWC hopes to introduce the service in London and Manchester from October.
Trials of the service have already begun in Manchester and are scheduled to start in London on 1 June.
Higher charges
However, new customers will have to pay higher charges to use many of the services. BSkyB has said it plans to raise the monthly subscription fees by up to £2.
Existing digital customers will not get a refund for the set top boxes they have already purchased - but will have their fees frozen for the time being.
BSkyB said it now had more than half a million subscribers for its digital television service - keeping it on target to hit its goal of one million digital customers by October.
To speed up the transition to digital, BSkyB said it plans to switch off its existing analogue TV service within three years.
BSkyB is also launching a free Internet access service, called skynow, which will offer 40% off standard BT phone calls.
The details were announced as the group revealed a fall in its nine month profits from £134m to just £69m.
Heavy losses
BSkyB is suspending the payment of dividends to fund the increased digital investment.
The company also warned that it will fall heavily into the red this year and has put aside £315m to pay for its massive marketing drive.
Mark Booth, Chief Executive of BSkyB, said: "Our new consumer proposition will transform the company and the entire industry. It gives customers free access to digital television, a free ISP and massively discounted telephony. It removes all the barriers to entry for customers."
BSkyB also revealed that the failed bid to buy the UK's most profitable football club, Manchester United, cost the group £6m. The deal was controversially blocked by the UK Government last month.
The City welcomed BSkyB's move. The group's share price rose 23.5p to 565p withing fifteen minutes of the London stock market opening.
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