BT unveiled plans on Tuesday to roll out a new UK fixed-line network offering broadband speeds five times quicker than those currently available.

The former fixed-line telephone monopoly, is to spend £1.5bn on a fibre-based network covering 10m homes that will mostly enable download speeds of 40 megabits per second, compared with the existing 8 Mbps industry benchmark.

BT has been spurred into action by Virgin Media, the cable television company, which plans to offer speeds of up to 50 Mbps to 12m homes by next summer.

Virgin Media will have a head start on BT, because the phone company will not start deployment of its super-fast broadband network until 2009-10. It is hoping to run the network past 10m homes by 2012.

BT has also been under pressure to commit funds to a super-fast network by the government, which is concerned that otherwise UK competitiveness could be damaged. Countries ranging from Japan to the US have already begun to install fibre networks.

Ian Livingston, BT chief executive, said in a statement that the company had taken "a bold step", while admitting that customers would pay a premium for super-fast broadband. He said the bulk of BT's £1.5bn investment was contingent on Ofcom, the regulator, allowing the company to make a "fair rate" of return on capital employed.

John Hutton, secretary of state for business, welcomed BT's announcement.

But BT's shares closed down 4.8 per cent at 192.3p, partly because the company said it was suspending its share buy-back programme. Investors are also concerned at the prospect of higher capital spending by BT.

Virgin Media's shares, which are listed on Nasdaq, closed down 5.1 per cent in New York, partly because the company has been making its higher broadband speeds the centrepiece of its marketing.

Howard Watson, Virgin's chief technology officer, rejected Mr Livingston's call for the company to open up its broadband network to competitors, which could expose it to greater regulatory scrutiny.

Shares in British Sky Broadcasting and Carphone Warehouse, BT's arch-rivals in the broadband market, also closed down, 3 per cent and 6.6 per cent respectively.

Jeremy Darroch, BSkyB chief executive, said it was "important that the regulatory regime finds the right balance of incentives to ensure that the broadband sector remains as competitive in the future as it is today".

The bulk of BT's super fast broadband network will involve running fibre from local phone exchanges to street side cabinets.

However, in some areas it plans to extend fibre to homes, so as to offer speeds of 100Mbps or more.

Analysts said BT's fibre move would undermine investments by BSkyB and Carphone in copper-based broadband networks.