Carphone Warehouse has thrown down the gauntlet to BT and other telecoms rivals with an offer of "free" broadband internet access.
Carphone said around 70 per cent of the population would be able to take advantage of a deal that bundles broadband with UK and international calls to 28 countries for £9.99 a month.
The new product is being sold through its Talk Talk landline service, which had 2.6 million customers at the end of March following the acquisitions of the UK businesses of Onetel and Tele2, although only 150,000 take broadband.
Analysts said the deal appeared to "significantly undercut" the £14.99 tariffs that are being offered by competitors for broadband, although Carphone customers must still pay £11 each month for line rental.
Jim McCafferty, a telecoms expert at Seymour Pierce, said: "We believe this product is a serious challenge to e stablished broadband providers."
BT has around 2.3 million broadband customers in its retail division while cable giant NTL has 2.8 million.
Nomura analyst Chris Alliott said: "This offer clearly ups the ante in the UK broadband market and adds to the competitive pressures on BT."
Charles Dunstone, chief executive of Carphone, predicted that broadband would become a standard service in the home like radio and television, changing society for the better.
He said: "For too long the British public has been charged costly fees for high-speed internet access, or has had to use slow internet connections. We are bringing this to an end."
Until now, Carphone has been hampered by having to resell BT's wholesale broad-band product. But it is investing £60 million to install its own broadband equipment in 1,000 BT exchanges - a process known as local loop unbundling.
Carphone said it was prepared to absorb losses until the unbundling programme is completed by May 2007.
Carphone said operating losses from its broadband business would be around £50 million in the year to March 2007, but the project was expected to deliver profits of up to £40 million over the following 12 months.
City broker Bridgewell Securities said the pricing of the Carphone offer was "clearly competitive and the roll-out more aggressive than probably most had anticipated".
In spite of the challenge to incumbent operators, analysts questioned how much of the market would fall under the control of Carphone.
"We are sceptical about the ability of Carphone to roll out all its exchanges within 12 months and to deliver a quality broadband experience at this price to a demanding market," Bridgewell said in a note to clients.
Mr McCafferty said the impact on BT should be less onerous than on small telecoms firms and companies that specialise in providing internet services.
"This reflects the fact that BT's most disloyal customers are likely to have changed provider already," Mr McCafferty said.
John Petter, chief operating officer at the consumer division of BT, believed that Car-phone would struggle to eat into the broadband market once customers noted there were a number of other charges involved.
These included a £9.99 monthly surcharge for customers who live outside the footprint of the 1,000 exchanges to be unbundled.
At the same time, Carphone wanted its customers to sign up to an 18 month contract - longer than most offers.
Mr Petter said: "I think there is no question that it does add an extra spurt of competition but it's not a game changer. I think customers will see through the small print in the contracts."
Shares in Carphone closed down 312p to 310p, but its performance in the last six months has put the company on the brink of the FTSE 100 Index with a market value of £2.78 billion.
Details were unveiled alongside a trading update from Carphone which showed that the number of connections made in the fourth quarter rose by a third to 2.23 million amid favourable market conditions.
Pre-pay deals continued to be more popular than long-term contracts, accounting for 1.33 million and 890,000 connections respectively.
Mobile connections over the coming year were expected to grow by 15 per cent and would be balanced across subscription and pre-pay deals.