It follows competition concerns raised by Ofcom in July, which BT had not voluntarily addressed, the watchdog said today.
In particular, Ofcom said BT had not gone far enough to address concerns over its ability to favour its retail business when making investment decisions in Openreach.
Ofcom said it was preparing a formal notification to the European Commission to start the process of making Openreach a distinct company within BT.
Under the proposals, Openreach would have non-BT board members and would have control over its own budget.
A spokesman for BT said: "We put forward proposals in July that we believe are fair and sustainable, and that meet Ofcom's objectives without disproportionate costs.
"We are implementing these proposals, and have just appointed Mike McTighe to be the first chairman of Openreach. We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach chief executive and the form of legal incorporation.
"We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK's digital future."
In September, BT and Virgin Media released their first ever joint ad campaign to promote their broadband service and fight against calls to sell Openreach. A sale of Openreach is likely to increase competition for Virgin Media given that Sky and other providers rely on Openreach to serve their customers.
Ofcom launched a review into Openreach last year and said it was concerned that the service on behalf of providers had "often been poor". Sky’s submission said that BT’s infrastructure investment decisions "reflect the interests of BT rather than the whole industry".
A Sky spokesman said: "Let's not forget why we are here – BT Openreach has continued to fail consumers.
"This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals." .