George Osborne has filed a formal complaint against Brussels over plans to cap bankers' bonuses over fears the move will backfire and drive up salaries.
The legal action was lodged on Friday, after it had been approved by the Chancellor.
The Treasury said the European Union had gone beyond its remit in seeking to regulate bonuses, which had been decided without proper consultation and with no impact assessment.
An HM Treasury spokesman said: "Britain has been at the forefront of global reforms to make banking more responsible, including big reductions in upfront cash bonuses and linking rewards to long-term success.
"These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers' fixed pay up rather than down, which will make banks themselves riskier rather than safer.
"In other words, as the Chancellor has said, they may undermine responsibility in the banking system rather than promote it.
"Regulation of pay in this manner goes beyond what is permitted in the EU Treaty. That's why we are challenging these rules in the European Court, to ensure the legislation respects the EU Treaty and actually achieves what it's meant to.
"A more stable banking system that serves the economy, businesses and consumers."
The Treasury says its lawsuit is based on a number of factors, including a failure to demonstrate the evidence base to support the move, as well as a lack of legal certainty.
According to Treasury mandarins, if the EU's plans go ahead, they will result in pushing up fixed pay, which is harder to rein in and claw back if necessary.
The UK Government, which sees itself as having led global efforts to clean up the banking system, feels the cap would reverse the progress it has made.
At the very least, the Chancellor hopes to delay Brussels' plans by asserting itself through the European Court of Justice (ECJ) in Luxembourg.
This is not the first time that the Treasury has resorted in referring a case to the ECJ. Mr Osborne previously sued the European Central Bank over proposed new rules which allegedly discriminated against UK-based clearing houses.
The timing of the announcement coincides with the Labour Party conference, in which Opposition leader Ed Miliband has characterised the Tories as the party which cares about millionaires rather than ordinary working people.
Mr Osborne's decision also co mes a few days before the Conservative Party autumn conference in Manchester. The move to stand up to Brussels overreaching its powers is likely to be welcomed by eurosceptics within the party.
Plans to cap bonuses to a maximum of two times bankers' base salary - subject to shareholder approval - may result in short-term gains, but in the long term they will undermine the City's status as a global financial hub, say Treasury officials.
Despite concerns from the UK, MEPs endorsed bonus restrictions as part of a wider scheme forcing banks to increase liquidity and set aside more money to give extra help to small businesses in April.
Members voted for a package which delivered the toughest EU banking rules so far in a ''banking union'' governing 8,200 banks in 27 countries.
Liberal Democrat MEP Sharon Bowles helped steer the deal through the European Parliament, insisting a bonus cap was needed across the European banking sector.
She said at the time: ''Realignment of the pay/bonus ratio to reasonable proportions reduces perverse incentives to risky behaviour even if total pay stays the same.''
The bonus rules are part of the new Capital Requirements Directive which obliges EU banks to set aside more capital as a cushion against economic shocks, encourages them to boost lending to small and medium-sized firms, and imposes strict new supervision and disclosure requirements.
The bonus cap, the most controversial provision, restricts bonuses to a year's salary or a maximum of two years if shareholders approve. With the law in force only from the start of next year, it will not apply to 2013 bonuses.