The dispute threatens to disrupt plans by Midland, owner of the Birmingham Post, for a pounds 200m stock market flotation.
Writs have already been issued against Mr Sullivan and Karren Brady, managing director of Birmingham City Football Club, alleging that they sent anonymous faxes to a number of City institutions and newspapers last week that falsely called into question the performance of the company and its newspaper titles.
Advisers to MIN, chaired by Sir Norman Fowler, the Conservative Party chairman, served the writs after discovering that the faxes came from Ms Brady's office at Birmingham City Football Club.
Christopher Oakley, the group's chief executive, said that although MIN is reluctant to take further action, going to the police or one of the City's regulatory authorities is still being considered. 'This is a silly dispute to have got drawn into, but our options are still open,' Mr Oakley said.
Ms Brady said she thought that MIN are 'just being pathetic'. She added: 'I think they should sit down and speak to me. All we want is a fair crack of the whip.'
Mr Sullivan said he would expand coverage of his News and Echo newspaper, which is published in the Manchester area, to compete with the Midland Independent Newspaper's titles in Birmingham if the dispute is not settled peacefully. 'I will marshal everything I can in opposition to them if it turns out that we can not resolve this matter in a fair and reasonable way,' Mr Sullivan told the Independent on Sunday. 'I can do direct things in the publishing field which could hurt them badly.'
MIN reporters would also be banned from the press box during Birmingham City matches. Though they would not be excluded from the ground entirely, they would be confined to a 'sterile area' between the home and visiting fans.
Mr Sullivan and Ms Brady are accusing MIN of providing a miserly level of financial support for their football club. Its contribution to the club is apparently limited to a single advertising hoarding, worth about pounds 2,000 a year.
Mr Sullivan is urging fans, advertisers and potential investors to boycott MIN until the company increases its financial contribution.
Insiders at MIN suspect that Mr Sullivan, who has tried to acquire other regional newspaper groups, may be trying to unsettle MIN in order to drive down its share price when it begins trading next month and acquire a stake on the cheap. But he said he had 'no intention' of buying any shares in the group. 'My motives are purely for Birmingham City Football Club,' he said.
MIN and Birmingham City came close to holding peace talks towards the end of last week. However, the initiative was abandoned after MIN's lawyers insisted that both Mr Sullivan and Ms Brady sign a number of preconditions before any meeting took place.
'No reasonable person could have signed those letters,' said Mr Sullivan. 'It would have been like signing a suicide note.'
A pathfinder prospectus for MIN published last week included a mention of the dispute with Birmingham City.
The fax to City institutions carried what purported to be an internal MIN memorandum which discussed ways of raising circulation figures, including the idea of asking staff to pay 1p each for their complimentary copies - a move that would allow the group to add these sales to the published figures.
Ms Brady, whose personal fax number appears on the faxed sheets, said she could not comment on the contents since she had no idea what they were. She said that the faxes could have been sent from anybody, since her office was 'fairly open'.
In a letter to Chris Mr Oakley, MIN's group chief executive, last month, Ms Brady wrote: 'Since our takeover, we have invested close to pounds 5,000,000 into the club and are about to embark on a pounds 6,000,000 project to build a new stand.
'The press interest we have created for you, has I am convinced, led to tens of thousands of copies of your newspapers being sold. The simple fact is that your newspapers have contributed pounds 2,000 this season.
'Compare that to West Ham, whose local free sheet bought a triple box, perimeter boards, investing a total of pounds 100,000, not to mention Leeds whose shirt sponsor is the local newspaper. Yet of the pounds 12 million plus you make each year you can not see your way to investing a small percentage of this. Even 1 per cent would be a great improvement.'
A spokesman for Morgan Grenfell, the merchant bank sponsoring MIN's share flotation, said the bank considered the dispute with Mr Sullivan to be a 'commercial irrelevance'. He said that since the dispute first flared up, sales of the group's Evening Mail had increased by 10 per cent.
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