The initiative is in part a response to the recent consultation with the sector, which found that the greatest obstacles to the sector's development are at a local rather than a national level.
Incentives for improvement will include a survey of relations between councils and the sector, leading to league tables showing where partnerships are working better and why.
The initiative will also build on earlier moves such as the Prime Minister's announcement last December, when he was Chancellor, that three-year funding for voluntary groups should be the norm.
Other moves already under way are training for local authority staff in commissioning work from the sector, and efforts to improve compliance with the Compact, the effectiveness of which will be reviewed in three years.
The emphasis on local partnerships is the third main strand of the review, published on the same day as Gordon Brown's book, Britain's Everyday Heroes, in which he praises the voluntary sector's role in enabling groups and individuals to bring about social change.
The other two strands are a greater emphasis on the campaigning role of the sector and its long-term sustainability. There will be a review by the Charity Commission of its campaigning rules, a new sector skills strategy and new money for community endowments.
The review also announced a new national research centre to produce and bring together reliable information on the sector. Phil Hope, minister for the third sector, said the review would take forward youth volunteering, which would "go up a couple of gears".
Stuart Etherington, chief executive of the NCVO and a member of the review's advisory body, said it signalled greater emphasis on the role of the sector in shaping public policy as well as delivering services.
"It shows a more subtle and rounded view of the role of the sector," he said.
Stephen Bubb, chief executive of Acevo, said the report affirmed that there was no inherent conflict between service delivery and campaigning freely and effectively.
Government strategy: the story so far
? The Government announced in the 2006 Budget that it would carry out a review of the future role of the third sector in social and economic regeneration.
? The first phase of consultation involved more than 1,000 organisations having their say on the review at 93 consultation events.
? The interim report was published alongside the Pre-Budget Report in December 2006.
? It highlighted five areas in which the Government would consider how charities could assist in regeneration. They were: campaigning, communities, public services, social enterprise and a healthy third sector.