Defence secretary George Robertson is to ask health authorities and trusts to bid for a 'centre of excellence' in military medicine.
The centre will replace the last remaining forces' hospital in the UK, Royal Hospital, Haslar in Hampshire.
Mr Robertson announced last week that it will close after 2002. About 80 per cent of the patients treated at Haslar are civilians.
A Ministry of Defence spokesperson said the new department would be 'attached to a major teaching hospital' and could be sited 'anywhere in the country'.
Mr Robertson said it would be 'a focus for our medics, providing high- level training and a sense of identity'.
The minister was speaking at the launch of a£140m package to 'transform' defence medical services, following the government's strategic defence review. It starts with an advertising campaign to combat a medical and nursing recruitment crisis in the forces.
Chief of staff Admiral Sir Peter Abbot said shortages of '1,000 regulars and 3,000 reservists' were an 'operational hazard' in dealing with conflicts in the former Yugoslavia - including Kosovo - and in Iraq.
Health secretary Frank Dobson welcomed the programme and paid tribute to the role of the military medical service in 'taking care of NHS patients'.
The proposals would 'help make sure that the defence medical services and the NHS work together,' he added.
In a sign of closer partnership between the two departments, senior NHS officials are to join a new MoD board co-ordinating medical strategy.
The closure of Haslar means the forces' medical service will rely entirely on MoD hospital units in NHS trusts.
The defence secondary care agency has renewed contacts with three civilian hospitals and is to set up a new unit at Friarage Hospital in Northallerton, Yorkshire.
This will replace acute services from Duchess of Kent Hospital in Catterick, which will close early next year.
The MoD is 'negotiating' with Portsmouth and South East Hampshire HA to replace Haslar with a military unit, possibly located in a new NHS hospital to be built under the private finance initiative.