Carphone Warehouse has launched a call and internet package it claims will cut residential bills by 60%.
A fast-growing number of firms now offer broadband connections
Customers using the phone operators' TalkTalk service will be able to make unlimited local and national calls from their home phone for £20.99 a month.
The package includes a broadband internet connection and unlimited calls to 28 countries.
Carphone Warehouse will make a loss of £50m on the business this year, but hopes to make a £40m profit by 2008.
By then the firm also plans to have paid off the start-up costs for the service, estimated at £110m.
By joining up to the service, TalkTalk customers will no longer have to pay BT's line rental charge, but will pay a one-off connection fee of £29.99.
Carphone Warehouse, which comes third in terms of UK landline market share, said it expected the investment to lead to an operating loss from the broadband business of around £50m in the current financial year to 2007.
It has set a target of having the service available in 1,000 telephone exchanges by May 2007 - covering about 70% of the UK population.
COMPARING BROADBAND COSTS
Carphone Warehouse Talk3: £20.99
BT Option 3: £26.99 + £11 BT line rental
NTL Telephone & Broadband: £32.99
Tiscali Broadband & Anytime Talk: £21.99 + £11 BT line rental
Prices are for monthly standard rates, including some free landline phone calls and a minimum download speed of 2Mb
Charles Dunstone, Carphone Warehouse chief executive 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."
If the local exchange is not ready for the TalkTalk service, customers will initially be connected via BT's wholesale service and then moved across at a later date.
A process called Local Loop Unbundling (LLU) enables phone companies to access customers directly, rather than having to go through BT's lines, as has traditionally been the case.
Analysts predict the latest offer could spark a price war and described it as a "landgrab" on the broadband market, increasing the pressure on BT.
But Richard Ireland, head of telecom for Ernst & Young, warned that "price wars do not always work in favour of the cheapest players".
Carphone Warehouse currently has 2.6 million residential voice customers and is aiming for 3.5 million by March 2009, with over 50% of them also using it for broadband access.
Giving a trading update on Tuesday, the company said that it had seen a 33% increase in connections in the 13 weeks to the end of March.
'Wake up call'
Carphone's move is the latest from a series of companies trying to tap into the broadband market.
"I think there is no question that it does add an extra spurt of competition but it is not a game changer", said John Petter, chief operating officer for BT's consumer division.
The number of unbundled lines has increased six times since May 2004, according to telecoms industry watchdog Ofcom.
"With a local loop unbundling strategy in place, Carphone Warehouse is positioned well to compete on price with BT.
"However it is just one of many competitors to BT with a strong hand to play," said Mr Ireland.
AOL and Tiscali already have a strategy to take advantage of unbundling.
BSkyB is also preparing to enter the broadband connection marketplace and said it would launch the service in the latter part of this year.
French Internet service provider Wanadoo is trialling an unbundled broadband service in the UK.
It is conducting a test run on 500 customers in Leeds, which, if successful, it will roll out in about 200 exchanges.
"This should act as a further wake-up call to consumers, who should take advantage of the numerous, low-cost phone and broadband packages now available to them," said Aamir Baloch, director at utilities switching service firsthelpline.
Ten million people currently have high-speed broadband internet access, but this figure is expected to rise to 19 million by 2010.