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BSkyB announced yesterday that it is to launch a "free" broadband service for its existing subscribers, as competition within the market for high-speed internet access continues to grow even fiercer.

Britain's biggest pay-TV group revealed that it would initially spend around £250 million on the initiative, while investing a further £400 million in the project over the next three years.

The satellite company expects the broadband package to break even by 2010, by which time it expects to have signed up some three million customers, or 30 per cent of its projected ten million subscriber base.

Under BSkyB's new three-tier broadband package, existing subscribers to the company's pay-TV package will be offered a basic package of two megabytes (MB) of bandwidth for free, although they will be required to pay a one-off connection fee of £40.

A faster mid-range product will also be targeted at young families for £5 a month, with a £20 connection fee. BSkyB's top-speed package will cost its subscribers £10, but will incur no connection charge.

The launch of BSkyB's new broadband package will see the company take on leading brands in an already competitive market. Mobile phone operator Orange and the Carphone Warehouse are currently offering heavily subsidised broadband packages as part of fixed-line and mobile telephone deals.

But BSkyB chief executive James Murdoch insisted that the company was well positioned to enter the expanding broadband market.

"Sky is ideally equipped to enter the large and growing markets of broadband and telephony by pushing the boundaries of the home entertainment market," said Mr Murdoch.

"This is a transformational new initiative for Sky," he added.

However, despite the company's optimism surrounding the announcement, BSkyB shares were down 4.3 per cent by the end of trading yesterday, as investors expressed concern that the group's entrance into the broadband market would involve heavy start-up costs.

Meanwhile, Mr Murdoch has hinted that BSkyB is looking at further expanding its broadband operations in the future by considering making an offer to buy Time Warner's AOL internet access business in the UK.