BT and Virgin Media have made moves to block a decision by the European Commission to grant state aid approval to the city of Birmingham to invest £10 million of government money to create one of ten 'super-connected cities'.
Both ISPs are concerned that the state-funded network will impact investment in their commercial rollouts.
The government recently earmarked £114 million from its £830 million broadband investment pot to provide ten cities - including Birmingham - 'ultrafast' broadband (up to 100Mbps) and high speed wireless access.
Birmingham required state aid approval from the European Commission (EC), which it was granted, and revealed that it would focus on businesses in Digbeth, Eastside and the Jewellery Quarter.
Sir Albert Bore, leader of Birmingham City Council, said at the time of the EC's decision that the green light would benefit residents and businesses in the future.
He said: "This will put Birmingham at the forefront of the race to deliver public services in new and innovative 'Smart' ways.
"It will undoubtedly help the city's future prosperity. I welcome the support of the European Commission in driving this forward, and the historic decision that has been reached."
However, BT and Virgin Media have now both asked the EC to re-think its decision.
A BT spokesman said: "We can confirm we have made an application to annul the Commission's decision. This is an unusual step for us to take but we believe the decision was substantially flawed.
"It would have discouraged commercial investment in high speed networks at precisely the time when such investment is required. It would also have set a dangerous precedent. We hope an alternative solution can be found as soon as possible so that companies such as BT can invest further in Britain's cities."
Similarly, a Virgin Media spokesman said; "We fully support the Urban Broadband Fund and government ambitions to bring superfast broadband to areas not currently served by existing fibre networks.
"So it's disappointing that Birmingham City Council has put forward a scheme which is not in the interests of local people and we believe, as a result, the European Commission has made a decision based on inaccurate and misleading information which could waste public money."
This announcement is going to come as unwelcome news to newly appointed culture secretary Maria Miller, who has been left with the rather difficult task of getting the UK's superfast broadband deployment back on track since Jeremy Hunt's departure.
BT and Virgin Media's move is the latest in a string of setbacks. Most notably, a recent report from the House of Lords Communications Committee questioned the government's success in increasing competition in the broadband marketplace, which has seen a number of ISPs pull out of the bidding process and to date has only seen BT win public funds.
Recent research also found that the UK has the lowest penetration of fibre-to-the-home (FTTH) in Europe, with only 0.05 percent of households connected.
The UK government has said that it hopes to have the best broadband network in Europe by 2015, and has committed a minimum of £830 million up until 2015 to support the rollout.