The EU has accused DT of abusing its dominant position in the local network through unfair pricing and discouraging new players from entering the market.
The German operator has two months to reply to the accusations before Brussels considers pressing formal charges, which could result in a fine of up to 10% of the operator's turnover.
At issue is the so-called "last mile", which links residential customers and small and medium-sized enterprises to local telephone exchanges. Local infrastructure, frequently referred to as "the local loop", is vital for the provision of telephone and Internet services.
Last year the EU passed a regulation requiring former monopoly telephone companies, including DT, to grant other companies access to local telephone lines under fair and non-discriminatory terms.
The policy, however, has not been a huge success. Only 1% of Europe's residential lines have been opened to full competition, according to the European Commission, the executive arm of the EU. So far, DT has opened only around 700,000 lines to full competition. It still controls nearly 98% of the local network.
European Competition commissioner Mario Monti has given the antitrust investigation a "priority" adding that, "still more can be done to foster competition". The commissioner has already taken action in Italy and Spain.
The investigation into DT's local telephone pricing scheme was prompted by Mannesmann Arcor. The company lodged a complaint in Brussels, accusing DT of charging competitive carriers more to access residential lines than the partly state-owned operator charges its own customers.
DT said that German regulatory officials had approved the rates. "We're really astonished by the EU investigation, considering that the tariff for unbundled local loop access was approved by our national regulator," said DT spokesman Stephan Broszio. He questioned whether it would be in the best interest of German computer users to see the cost of Internet access rise rather than fall.