J SAINSBURY is linking up with Carphone Warehouse to undercut BT on the cost of residential phone calls.

The initiative is part of a growing challenge to BT in its core market. A recent regulatory innovation has allowed rivals to offer cheap services without requiring customers to dial a prefix or install a box on their line.

Industry estimates suggest that 1m customers will have switched to a so-called carrier pre-selection service by the end of this month. Many of these are small-business customers, but competitors are increasingly making inroads into the residential market. Some firms claim to be able to cut the cost of telephone bills by more than half.

Sainsbury is again aping its great rival, Tesco, which is in the process of establishing Tesco Telecom. Neither of the supermarket groups has revealed its pricing strategies, but with their access to millions of customers they are expected to be highly competitive.

Sainsbury will provide its service through Carphone Warehouse, the mobile-phone retailer that late last year moved into the fixed-line market with the £65m acquisition of Opal Telecom. Opal leases capacity from BT and other network operators to provide a fixed-line service to more than 20,000 business customers.

Carphone last month launched its own offering, Talk Talk, which claims to cut the cost of landline calls by up to 30%.

Almost 20 years after competition was introduced to the British telecoms industry, BT still retains 73% of the residential phone market.

Pierre Danon, chief executive, will this week announce a new price tariff to counter the increased competitive threat. BT has already set a 10p maximum charge on all business calls of less than an hour, and may be planning something similar for residential customers.

Danon said: “We are preparing our response on pricing for the consumer. It would be a mistake not to expect a very vigorous reaction from BT.”

The erosion of BT’s original business explains the company’s determination to return to the consumer mobile market, only 18 months after demerging its own mobile arm, now called MM02.

BT is working with T-Mobile on plans to launch a new mobile business later this year. It is thought to have earmarked £25m to promote the brand, which may be akin to “virtual operators” such as Virgin Mobile.