The EU has begun legal proceedings against the UK after it refused to ditch plans to override sections of its Brexit divorce deal.
An EU deadline for the government to remove sections of the Internal Market Bill expired on Wednesday.
The "letter of formal notice" could eventually lead to a court case against the UK at the European Court of Justice, the EU's top court.
But the EU has not walked away from talks over a post-Brexit trade deal.
European Commission President Ursula von der Leyen said the UK would have until the end of November to respond to the EU's concerns over the draft legislation.
UK-EU trade talks are continuing in Brussels this week. Prime Minister Boris Johnson has said both sides should "move on" if a deal was not reached by mid-October.
In a brief statement, Mrs von der Leyen said the bill was a "full contradiction" of previous UK commitments over how a hard border on the island of Ireland should be avoided.
She added that the bill was by its "very nature a breach of the obligation of good faith" contained in the withdrawal agreement that took the UK out of the EU in January.
A spokesperson for the UK government said the bill was a necessary "safety net" to protect trade between different parts of the UK.
They added the government would respond the EU's letter "in due course".
Dutch Prime Minister Mark Rutte appeared to play down the importance of the Commission's letter, calling the move "more administrative than political".
What powers does the EU have?
Analysis by Nick Beake, BBC Brussels Correspondent
Although the headline is dramatic, this was the EU's next logical step.
When it fired the UK an ultimatum to scrap the most controversial parts of the Internal Market Bill by the end of September, it knew it would likely have to follow up on its threat. And now it has.
But any legal path is long and unpredictable - with no resolution likely to come before the UK's transition period ends on 31 December.
The legal advice given to the EU member states has been that for any alleged breach of the withdrawal agreement committed in 2020, they would have a further four years to pursue the UK.
For any alleged breach committed after the transition period, the EU could use the dispute settlement mechanism (which both sides agreed to in the agreement) to penalise and fine the UK.
Or, it could ask the European Court of Justice to do the same. But this is drawn out legal territory.
It seems the latest legal development will not torpedo the ongoing trade talks - for now.
Both sides insist they do want a deal within the coming weeks, but the EU says it won't sign one off, as long as the UK's bill remains as it is.
The EU and the UK are now trying to walk two tightropes. And it's precarious balancing act.
One route leads to a trade deal, the other to an ugly court battle.
But both sides are looking dead ahead, and neither want to blink first.
Labour leader Sir Keir Starmer called for both the UK and EU to work together over trade differences, adding: "A deal can be done here".
"It's absurd that with weeks to go, the focus and the energy is not on their negotiations, it's on threatened court proceedings," he added.
MPs gave their final backing to the Internal Market Bill earlier this week. However, it will have to be approved by the House of Lords before it becomes law.
In a bid to head off a potential rebellion from Tory backbenchers, ministers have granted the Commons a say before powers to override the Brexit divorce deal could be used.
The letter sent to the UK is the first stage in the process the Commission uses against countries it believes have broken EU law.
It can end with the Commission taking governments to court at the European Court of Justice.
The ECJ continues to have powers over the UK during the transition period, including over the interpretation and implementation of the withdrawal agreement.
The court has powers to force countries to comply with its rulings, including imposing financial penalties.
However, most cases are settled before then - and it can take many years for a case to move through the court.
What is the Internal Market Bill?
The bill sets out rules for the operation of the UK internal market - trade between England, Scotland, Wales and Northern Ireland - after the end of the Brexit transition period in January.
- No new checks on goods moving from Northern Ireland to the rest of Great Britain
- Giving UK ministers powers to modify or "disapply" rules relating to the movement of goods that will come into force from 1 January if the UK and EU are unable to reach an alternative agreement through a trade deal
- Powers to override previously agreed obligations on state aid - government support for businesses.
The bill explicitly states that these powers should apply even if they are incompatible with international law.
Ministers say the legislation is needed to prevent "damaging" tariffs on goods travelling from the rest of the UK to Northern Ireland if negotiations with the EU on a free trade agreement fail.