The broadband pricing war has heated up with satellite firm BSkyB launching a free service for its subscribers.
Sky hopes to plug into a whole new market
Under the offer, existing network customers can get its 2Mb Base package for free. Sky expects 30% of its eight million network users to sign up.
New subscribers to Sky Digital will be able to sign up for its broadband offering for between £5 and £17.
Sky said it would spend about £250m on the move, adding it expected to invest a further £400m over three years.
Shares in the group fell on the news amid analyst fears that the decision may mean expensive initial outlays - partly down to the cost of installing Sky equipment in BT telephone exchanges to access the local loop.
Sky's shares closed down 4.3% following the announcement.
"Sky is ideally equipped to enter the large and growing markets of broadband and telephony by pushing the boundaries of the home entertainment market," chief executive James Murdoch said.
"This is a transformational new initiative for Sky."
SKY BROADBAND PACKAGES
Base - 2Mb download speed, £40 connection fee, £50 installation, free subscription, 2GB monthly limit
Mid - 8Mb, £20 connection, £50 installation, £5 monthly subscription, 40GB usage
Max- 16Mb, free installation and connection, £10 monthly subscription, unlimited usage
Connect - 8Mb, £40 connection, £50 installation, £17 a month, 40GB usage
Sky's new service aims to compete with market leaders BT, AOL and NTL.
Like Sky these firms also offer a different range of packages, depending on things like download speed and, in BT's case, usage caps.
Take into account other elements such as introductory offers, length of contract, installation costs, line rental, off-peak tariffs, and upgrade costs, and it can be tricky to make a direct comparison between different offers.
Meanwhile Sky will also face competition from heavily subsidised broadband services offered by mobile phone operator Orange.
Industry analysts also expect the group to widen its online entertainment portfolio - offering more than its current movie and sports downloads.
Meanwhile, Mr Murdoch also hinted that Sky planned to expand its reach online by admitting the company is among the suitors looking to buy Time Warner's AOL access business in the UK.
"We would look at it from purely an opportunistic basis," he told reporters.
Sky - which is 38% owned by Rupert Murdoch's News Corporation - will begin signing up customers for the three-tier service, offering download speeds from 2Mb to 16Mb, which launches next month.
While customers will not have to pay for the ongoing service they will have to pay installation and connection fees. These range from nothing to £50.
Only 28% of UK households are currently covered by Sky's broadband network but it will be rolled out to 70% by the end of next year.
Customers currently not covered by Sky's network are being offered a fourth Connect broadband service, which carries the highest tariff of those on offer.
Meanwhile, prospective broadband customers will also still need to have a BT line for the service which costs £11.99 a month.