BT and Virgin Media are appealing a ruling that would allow Birmingham city council to use to use public money to build a fibre-optic network that would compete with the ISPs' existing ones in the area.
According to the BBC, a complaint was filed against the planned network last week.
A Virgin Media spokesperson said: "It's a poor implementation of what is otherwise a sensible policy. It sets a bad precedent and sends a really bad signal to our investors."
The council's network received £10 million ($A15.5 million) from the government's super-connected cities fund. Funding was approved by the European Commission.
The city planned to lay fibre-optic cables in central areas to build a 100Mbps and faster network, expecting some 1000 new jobs to be created.
Councillor Jay McKay expressed disappment with the legal action, saying it came at a late stage and after collaboration with the providers over the past few years to develop the city's business case to build the network.
The legal action could also hamper British governmen ambitionst to have the fastest broadband in Europe by 2015.
Presently, UK has some of the slowest broadband in the EU.
Opposition party Labour was quick to use the legal action by the providers to attack the government. Chi Onwurah, shadow minister for business, innovation and skills said that "It's another example of the chaos and incompetence at the heart of the government's broadband strategy."