The telecommunications watchdog Oftel took the decision to ban the high- profile promotion featuring the comedian Rory McGrath after deciding that BT was in breach of its licence.
Oftel initially agreed to let BT run the campaign after being assured that it would only be aimed at consumers without a telephone and that the marketing spend would be a modest pounds 180,000.
But it began to receive complaints from rival operators after the campaign turned into a full-scale multimedia exercise backed by a pounds 2.5m budget designed to lure customers back from cable companies.
Don Cruickshank, the director general of Telecommunications, said: "Oftel has ordered BT to stop the campaign immediately. We have acted firmly because the campaign is not fair competition between operators. I am disappointed that I have had to act in this way, not least because one of the consequences of BT's actions is that some people without telephones will not now be able to benefit from the current offer."
Under the promotion customers who had had their BT line disconnected for at least three months could have it reconnected for the standard reconnection charge of pounds 9.95 and then receive 25 per cent off all local, regional and national calls for the first quarter.
Oftel concluded that the offer, which was due to run until 10 March, breached BT's licence because it would never be able to recover the money the promotion was costing from the customers it succeeded in taking on.
Last night a BT spokesman said: "We have received the order and will comply with it with immediate effect. From today all advertising, promotion and mailing promoting the offer will stop. However customers who have already signed up will still qualify for the special offer."
He added that BT would now look at its procedures to see how it came to be in breach of its licence and ensure it did not happen again. BT refused to say how many customers the offer had attracted, however.
This is the second time in recent months that BT has been slapped over the wrists by Oftel and ordered to stop a promotion. In October last year Mr Cruickshank instructed BT to withdraw a joint promotion with BSkyB offering customers who took part in its friends and family scheme discounts on BSkyB subscriptions and monthly telephone bill credits.
Bob Frost, chief executive of the Cable Communications Association, said: "It is appalling that BT has misled the regulator and the British public. Don Cruickshank has acted swiftly to defend consumer choice and fair competition, once again underlining the continuing need for effective regulation to stop dominant players abusing their position."