Arroyo, who is facing impeachment proceedings over allegations of vote-rigging and corruption, said on Monday she supported rewriting the constitution to change from a presidential to a federal parliamentary system.
"It's time to start the great debate on charter change," she said in her annual state of the nation address to Congress, to prolonged applause from the gallery, packed with her supporters.
"The system clearly needs fundamental change and the sooner the better," she said, adding that "our political system has now become a hindrance to our national progress".
Arroyo said the Philippines would make swifter progress "under a parliamentary system similar to that of our progressive neighbours in the region".
She has previously said the Philippines' US-presidential style of government had often led to gridlock between the executive, the judiciary and the two houses of Congress.
Switching to a parliamentary system would remove some of this gridlock while switching to a federal system would give the provinces a greater voice in policy-making.
She also said on Monday that the stability and economic growth in different provinces "make a compelling case for federalism".
The president gave no timetable for the initiative.
Arroyo's 23-minute speech made no reference to the seething political crisis stemming from opposition audiotapes which allegedly show that she cheated to win the May 2004 elections.
She also made no reference to the impeachment complaint filed by the opposition just hours earlier, accusing her of cheating, corruption and human rights abuses.
Scores of Filipinos are adamant
their president should step down
The Philippine leader said choosing the method of rewriting the constitution was the "prerogative" of Congress but she suggested it would be faster for Congress to convene itself into a "constituent assembly" rather than to elect a body to draft a new constitution.
"I shall work with Congress, civil society groups and local executives who are convinced that charter changes are needed to enable the country to surmount the unprecedented challenges of the 21st century," she added.
The opposition filed the impeachment against Arroyo in the lower house on Monday.
Speaker Jose de Venecia, an ally of Arroyo, sent the motion to the justice committee, which has 60 working days to weigh the merits of the complaint before a vote by the lower house on whether to send it for trial by senators in the upper house.
The opposition could have sent the motion straight to the Senate with 79 or more votes, but now must wait for the justice committee to finish its deliberations.
Ronaldo Zamora, an opposition member of the lower house, said Arroyo's rivals were still short of the required support of one-third of the 235 law-makers.
"We are close. We haven't crossed 79, but I'm confident that we will get that number," he said on radio on Monday.
"There is no more room for big empty promises, devious manoeuvrings, motherhood statements, dead and dry statistics, unrealistic projections"
Roman Catholic archbishop
"Many in the administration have asked that they want to come out openly within the next week or next two weeks."
Arroyo, due to finish her second term in 2010, has defied calls to resign.
She has been shoring up her economic team and support base after mass resignations and defections on 8 July appeared to be driving her presidency to the brink of collapse.
But Archbishop Oscar Cruz, a senior member of the country's influential Roman Catholic clergy and a vocal critic of Arroyo, said the president had to talk about the true state of the nation.
"There is no more room for big empty promises, devious manoeuvrings, motherhood statements, dead and dry statistics, unrealistic projections," Cruz said.