The Post Office has set its sights on grabbing a "significant slice" of the home phone market as it returns to the sector after an absence of 24 years.
Analysts have questioned the Post Office's ability to lure customers
Launching its new HomePhone residential service, the group said call costs would be almost 20% cheaper than BT's.
The Post Office said it aimed to sign up one million customers - 5% of BT's current residential business - by 2008.
BT criticised the Post Office's new service, saying it offered poor value for money.
The Post Office is one of the first groups to make use of new laws allowing users to pay line rental to firms other than BT.
"With the launch of Post Office HomePhone, we intend to win a significant slice of the residential telephony market," chief executive David Mills said.
"The consumer stands to make excellent savings and the Post Office stands to develop an important new service into a significant new business stream."
But BT dismissed the Post Office's attempts to steal some of its customers.
"If customers are looking for good value from the Post Office, frankly they're better off sticking to stamps," said Gavin Patterson, group managing director of BT's consumer division.
The Post Office said that its service was the most transparent on the market as a result of its simple tariff and charging structure - as well as the lure of a single bill for both calls and line rental.
HomePhone is not the Post Office's first foray into telecoms
Under the new Wholesale Line Rental legislation, customers no longer have to pay a separate bill to BT for their home phone line.
Many companies charge for calls only, which means two phone bills for consumers.
Line rental will cost £11.50 a month, or £10.50 by direct debit. Customers will be charged by the second and there will be no minimum call charge.
The Post Office added that customers currently on BT's Together Option 1 who switch to HomePhone could save an average of 12% while some households could save up to 20% by changing providers.
The Post Office has a long history in the telecoms industry - as GPO it was responsible for all UK calls from 1912, when a national service was introduced, until BT was spun off in 1981.
However, BT said most telecoms providers were now offering bundles of inclusive minutes.
"While the rest of the market has followed our lead and produced imitations of our simple, good value, BT Together packages, we're surprised that the Post Office has taken such a backward step with its pence per minute approach," said Mr Patterson.
"All in all it's stuck in the dark ages when it comes to offering value to today's residential phone callers."
BT claimed the Post Office would be up to 10 times more expensive for hour-long off-peak calls and would charge more for 0870 and 0845 numbers.
"This isn't the first time that the Post Office has tried to enter the telecoms market," said Mr Patterson. "We expect this latest foray to go the same way as their previous attempts."
BT's residential telephony market is under threat from rivals including Carphone Warehouse with its fixed-line TalkTalk service, Tele2 and One.Tel.
"The writing has been on the wall for some time that BT's dominance of Britain's phones will soon disappear," said Charles Dunstone of Carphone Warehouse. "Customers are increasingly aware that they have a choice."
Even so, the Post Office may find its fixed-line phone venture is very hard going, analysts said.
"It will enter a very competitive segment that is red-hot already, and where prices continue to fall," said Mike Cansfield, research director at London-based research consultancy Ovum.
"The HomePhone offer is not compelling, the Post Office has credibility problems with its existing business," he said. "It has entered the wrong market sector."