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.