Bord Gáis has suffered a setback following a decision by a rival to challenge legally a multi-million euro contract the State-owned company won in June.

Bord Gáis was awarded the contract to supply gas to major towns in Northern Ireland by Ofreg, but the company which lost out in the competition, Phoenix Natural Gas, is seeking leave for a judicial review of the decision.

Bord Gáis was hoping to add hundreds of thousands of customers to its client base. At present large areas of Northern Ireland have no access to gas, with oil and electricity dominating the market.

Bord Gáis said last night it hoped the matter could be resolved quickly. "It would be regrettable if this process were to affect the delivery of natural gas to towns outside Belfast," it said in a statement.

It is unclear how long the legal action may drag on, but some sources claim the deal could be put back by a year.

The value of the contract has never been disclosed and Bord Gáis declined to comment on how much money it could lose because of the delay.

The chief executive of Ofreg, Mr Douglas McIldoon, said the decision by Phoenix might be seen by many as "nothing more than a spoiling tactic".

He said if the action was successful it would "deny 25 per cent of Northern Ireland's people and businesses who live in our district towns the economic, social and environmental benefits of gas".

Ofreg said it hoped Phoenix would "think again" and focus its energies on it existing business in the greater Belfast area.

Phoenix for its part said: "After careful consideration, Phoenix has decided to seek a judicial review of this decision. The matter is now in the hands of the court. Until the court has made its determination, Phoenix is unable to comment any further."

In June, Bord Gáis was awarded "preferred bidder status" for the licence to deliver gas to major towns outside Belfast.

The company is working on a pipeline between Belfast and Derry.

This north-west pipeline will link up in Derry with Coolkeeragh power station. It also intends to build a pipeline from Gormanston, Co Meath, to Belfast, known as the South North pipeline.

The construction of these two pipelines opened up the possibility of supplying gas to towns along the routes. While some of the towns are small in terms of population, larger towns like Portadown, Craigavon and Newry have large populations and would be attractive.

Phoenix and Bord Gáis were the only companies which applied for the licence. Phoenix Natural Gas has three shareholders.

US energy company Keyspan has 24.5 per cent, East Surrey Water has 24.5 and the rest of the company is owned by British Gas.