Speaking at an Arts for Labour fringe meeting during the Labour Party conference in Brighton on 27 September, Mr Dyke said that he joined the BBC at the height of the dot com boom when the BBC was the most visited site in Europe.
"We thought we could make a fortune out of this, and that maybe we should make these into commercial websites," he said.
"Of course being the BBC, it took us at least 18 months to work out the barrier between commercial and public service. By that time the dot com boom had disappeared and there was no money left."
Mr Dyke defended the principle of providing public service and said that as well as being key to developing a new, younger audience for the BBC, the corporation had invested in web projects that were unlikely to be commercially viable, such as the children's site CBeebies.
"What the BBC has done on the web – and John Burt started it before I got there, I just put more money into it – I think is one of the greatest BBC success stories of the last five years," he said.
"Giving information on the web, other than very specialist areas, has to be public service not commercial. The dot com boom was wonderful - sites like the Wall Street Journal and FT cover specialist areas - but by and large the public wont pay for news."
The BBC has been unfairly accused of using public money to undermine business, said Mr Dyke, because many of the online projects set up by the BBC would not have been commercially viable.
"We have to look harder at what is in the public good. Most of us that elected a Labour government thought the world would be viewed that way, but instead this government fell in love with the commercial sector in a way that I just don't understand."
Mr Dyke has been a lifelong supporter of the Labour Party, but was required to withdraw his party membership when he became director general in 2000.
"I've worked in big businesses and will probably go back and run another one; your job is to maximise profit. There's nothing wrong with that - that’s what the job is.
"But don’t let the government believe it’s anything else."
Mr Dyke was promoting his new book 'Inside Story' about his background in broadcasting and his eventual resignation from the BBC following the Hutton Inquiry.
Lord Hutton led an investigation into the suicide of weapons expert Dr David Kelly, who was a source for a BBC Radio 4 story on Iraq's weapons of mass destruction. The Hutton report concluded that the BBC's story was flawed, and three members of BBC staff, including Greg Dyke, later resigned.
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Arts and Labour: http://www.arts4labour.net
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