Changes could be introduced to make it easier and cheaper, and less intrusive, for trans people to get legal recognition of their changed gender.
Launching a consultation on the issue, Theresa May said she wanted to make the process of acquiring a Gender Recognition Certificate more "streamlined and de-medicalised" after research showed that trans people find it "overly bureaucratic and invasive".
However, she stressed that any changes will not affect provisions in the Equality Act 2010 which permit single-sex services such as women's refuges to exclude transgender people if this is proportionate and justified.
The 16-week public consultation on the operation of the Gender Recognition Act 2004 in England and Wales was launched as the Prime Minister hosted a Downing Street reception for the LGBT community ahead of this weekend's Pride celebrations.
It came after the launch of a new £4.5 million LGBT action plan, including a ban on so-called "gay cure" conversion therapies.
The initiative follows a major Government survey which received responses from more than 108,000 LGBT people, including over 14,000 trans and non-binary people.
The survey found "considerable misunderstanding" about the requirements of applying for a Gender Recognition Certificate, which is given to people who are legally recognised as being of their new gender.
Government figures show that just 4,910 people have successfully obtained a certificate since the legislation came into effect. This is far fewer than the estimated size of the trans population in the UK.
The consultation will assess whether there is a need to change rules which require applicants to:
- Provide two medical reports, one showing a diagnosis of "gender dysphoria" and the other outlining details of treatment received;
- Obtain the consent of their spouse if married;
- Demonstrate that they have lived in their acquired gender for at least two years; and
- Pay a fee of £140.
Mrs May said: "Last year, I committed to carrying out a consultation on the Gender Recognition Act and I'm pleased to be able to launch that today.
"What was very clear from our survey is that transgender people across the UK find the process of legally changing their gender overly bureaucratic and invasive.
"I want to see a process that is more streamlined and de-medicalised - because being trans should never be treated as an illness."
Equalities minister Penny Mordaunt added: "The discrimination and bigotry that the trans community currently faces is unacceptable in today's society - we need a culture change.
"We want to help people to thrive and to go about their daily life, living in the gender they choose without intrusion or fear of humiliation.
"This consultation is a chance for us to change the current system for the better and I look forward to hearing everyone's views."
Ministers are not setting out any firm proposals for change at this stage, and will consider responses to the consultation before deciding on the way ahead.
Trans charity Gendered Intelligence welcomed the consultation.
The charity's policy engagement officer Cara English said: "Meaningful reforms to the Gender Recognition Act are desperately needed if we're going to make the process easier, less bureaucratic and exclusionary for trans and non-binary people.
"It's encouraging to see the Government take the needs of LGBTQI people seriously, recognising that the GRA needs to be reformed to make it more transparent for those who need to access it.
"This consultation is all about highlighting the lived experiences and needs of people disenfranchised from the current GRA and giving value to their voices."