Sky could be forced to sell its top films and sports channels to competitors at a fixed rate under proposals from media regulator Ofcom.
But Sky has promised to fight any control over the way it can sell premium channels to Virgin, Top-Up TV, BT Vision, Tiscali and other competitors.
In the latest round of its investigation of pay-TV, Ofcom also threatens to examine the FA Premier League's sale of football rights and refer its Hollywood movie deals for video-on-demand to the Competition Commission.
Ofcom's Pay TV phase three document said: "Sky is acting on an incentive to restrict the distribution of premium channels, with effects on a variety of platforms including cable, DTT [Freeview] and IPTV.
"This situation has a detrimental effect on consumers, in the short term by reducing choice, and in the long term by dampening competition."
Sky holds exclusive UK distribution deals with all six major Hollywood movie studios, and for many sports. It's only required to sell these wholesale to Virgin Media, but does offer a retail package through Tiscali TV.
The 360-page report concludes that Sky could make more money by selling the premium Sky Movies and Sky Sports channels wholesale to all other pay-TV platforms, but it chooses not to to make them less attractive to consumers.
Sky denied the reports conclusions and promised to fight any proposed remedies. A Sky spokesperson said: "We disagree fundamentally with Ofcom's approach, analysis and conclusions.
"In light of Ofcom's determination to pursue its preferred outcome, we will use all available legal avenues to challenge this unwarranted intervention."
Virgin Media welcomed the report, which supports many of its complaints about Sky. Neil Berkett, CEO of Virgin Media, said, "We have always argued that the pay TV market is not working in the interest of consumers.
"Ofcom's statement appears to be an exhaustive analysis of the problem and we're pleased the issue is getting the careful scrutiny it deserves. We will continue working with Ofcom to bring its investigation to the quickest possible conclusion."
Ofcom has proposed a range of prices which would still allow Sky to make a 'reasonable return' on the costs of films and sports and boost its wholesale revenues by making them more widely available.
These include adding a premium for high definition film and sports on the premium channels.
Ofcom also wants to break out subscription video-on-demand film rights from the TV channel deals, because it thinks Sky is holding the rights without making good use of them.
It wants to talk to the Hollywood studios, but has warned it could refer the topic to the Competition Commission.
The consultation on Ofcom's proposals will be open for 12 weeks at http://www.ofcom.org.uk/consult/condocs/third_paytv/
