Germany's HSH Nordbank is to sue the Swiss banking giant UBS for mis-selling millions of dollars of investments linked to US sub-prime mortgages.
UBS has been one of the banks worst-hit by sub-prime debt
It wants to recover "significant" losses on a $500m (£253m) portfolio it bought in 2002.
HSH Nordbank alleges that UBS did not manage the assets in line with its "prudent investment objectives".
Record default rates on US sub-prime mortgages have caused problems for banks throughout the world.
Sub-prime loans are offered to people with inferior credit records or unpredictable incomes.
Wave of claims
US banks repackaged the debt into products known as Collateralised Debt Obligations (CDOs), which were then sold on to other banks.
If HSH Nordbank is successful there could be a wave of such legal action from other banks and investors who claim not to have been made aware of how risky CDOs were.
HSH Nordbank is one of Germany's largest financial institutions, created by the merger of Landesbank Schleswig-Holstein with Hamburgische Landesbank, and is majority-owned by the state governments.
It plans to file its suit in the State of New York by the end of the month.
UBS has so far declined to comment.