Dyke, who is chair of the Local Television Advisory Committee (LTAC), yesterday submitted a 40-page report on the UK's local TV sector to culture secretary Jeremy Hunt.
Last month, an advisory panel run by Lazards investment banker Nicholas Shott indicated that local TV would only be viable in around 10 or 12 of the UK's largest cities, starting on digital terrestrial television (Freeview) but ultimately moving to IPTV platforms.
Dyke's report, compiled by media consultants Oliver and Ohlbaum, claims that an alternate business model is possible to bring sustainable local TV to smaller towns and cities.
In a speech delivered at the University of York last night, Dyke said that local TV "can be cheaper to run than Shott believes".
Shott's report estimated that a network of 10 local TV services would have a combined cost base of around £25m. As just £5m would come from local advertising, the services would need to earn a further £15m from national advertising revenues and the BBC would have to provide around £5m of locally-produced content.
Dyke believes that the local TV sector could attract more funds from local advertising, but only if the government introduces a major liberalisation of the regulatory system.
"To make local television work, to encourage innovation, we may also have to have a bonfire of regulations which were put in place in one era and not applicable for this sort of television," he said.
"There is no reason in local television why there shouldn't be a split screen with ads running at the same time as programmes; there is no reason why a regulator should decide how many ads run in each hour; there is no reason why local advertorials shouldn't be allowed."
Dyke has also questioned the logic of only bringing local TV services to major urban cities, which are "already the focus of regional TV news services".
He called on the culture secretary to "be brave" and take greater risks in developing the local TV sector. Hunt is expected to outline the government's plans for local TV in a speech in Oxford next week.
The minister wants to create a network of up to 80 local TV stations in the UK, including the first stations being licensed next summer and 10 or 20 services coming online by 2015.
Dyke's report tells Hunt that the use of DTT transmitters would be "materially less expensive" than streaming local TV stations over the internet. It also calls on providers of electronic programme guides (EPGs) to scrap listing fees for local TV services.