Virgin Media and BT have launched a legal challenge against Birmingham City Council over its plans to develop a super-fast broadband network.
The council had been given the green light to invest £10 million bringing fast broadband to the city, arguing it will help local areas which are underserved by existing providers.
But Virgin Media said there is "significant overbuild" with its current network.
Birmingham’s Smart City project would see the creation of a 100+Mbps broadband network to serve specific local areas including Digbeth, Eastside and the city's Jewellery Quarter.
The council said businesses in those areas do not have access to "affordable" high-speed broadband.
Virgin Media and BT's decision to challenge has the potential to damage the creation of up to 1,000 new jobs, the authority claimed.
Councillor James McKay said the council was "extremely disappointed" by the actions of the broadband providers.
"The city has worked in a very positive and collaborative way with them over the last few years to help inform and develop our business case and we are surprised that they have now chosen to appeal at such a late stage," he said.
"We are liaising with government and the European Commission and we are advocating that this matter be treated with some urgency as a 'test case' for Europe and that everything that can be done to expedite it through the legal process is done."
In a statement Virgin Media said the plan is a "poor implementation" of what is otherwise a "sensible" policy. "It sets a bad precedent and sends a really bad signal to our investors."
Chris Conder, a campaigner for rural broadband, told the BBC: "Virgin and BT have had plenty of time to modernise, and they haven't.
"It's time to stand up for the Davids against these Goliaths."
Birmingham did not feature on the original list of ten UK cities to benefit from a £100 million government fund to create 'super-connected' hubs.
George Osborne, the chancellor, announced the plans earlier this year, which aim to deliver high-speed broadband to 1.7 million households and 200,000 businesses.