Local authority social service departments will be stripped of their duty to monitor standards of care and safety in private and voluntary nurseries. They will also lose the funding for this work.
Instead money will go to a new "arm" of OFSTED, which will have its own name, and is intended to unite the regulation of early-years education and childcare.
Playgroups and nurseries will now fall completely within its remit. At present private and voluntary childcare providers are inspected twice. Social service inspectors check on safety, while OFSTED assesses the quality of education.
OFSTED will also take over the safety checks on registered child-minders, but any education they provide will not be inspected.
Margaret Hodge, the minister responsible for the early years, said the proposals would sort out the "confusion, duplication and unfairness" of having two separate inspection regimes.
But local government leaders and the Association of Directors of Social Services criticised the plan, accusing ministers of sidelining social services departments.
Chris Woodhead, the chief inspector of schools, acknowledged that the expansion was a "huge undertaking". It comes after last month's announcement that OFSTED would be responsible for inspecting further education courses for 16 to 19-year-olds.
Mr Woodhead said: "We are not complacent about the scale of the undertaking. We will need to talk a great deal with colleagues in social services departments."
Inspectors will use a new set of early learning goals, which form a foundation stage of the national curriculum, to assess provision for the under-fives.
The goals, which went out for consultation this spring, have yet to be finalised, but are expected to ask children to be able to hold a pen correctly, write their names and count up to 10 by age five.
Mr Woodhead rejected claims that the change would increase academic pressure on young children. He said: "There is no question of requiring young people to jump through hoops they are not ready to jump through. This is good news for children and parents. Children will have a consistency in the standards of day care and education across England.
"This is also good news for
policy-makers as OFSTED will be able to collect registration and inspection data, and to monitor trends in the quality of provision."
But David Rogers, vice-chair of the Local Government Association's social affairs and health committee, said: "Many social services departments have extensive skills and experience in delivering an excellent inspection service for day and nursery care. I am baffled as to why the Government wants to take this away from them."
Shadow education secretary Theresa May criticised the extension of OFSTED's remit. She said: "The Government needs to think seriously about whether OFSTED is qualified and equipped to inspect people who are primarily providing care for people, not education."