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The controversial proposal to transfer Glasgow Council's housing stock to the Glasgow Housing Agency (GHA) may be ruled illegal and in breach of European competition laws.

The European parliament in Brussels has been petitioned by Mike Daily, principal solicitor with Govan Law Centre, and Colin Deans, a council house tenant. The petition claims that the Scottish executive did not offer choice or introduce competition to the move because it proposed transfer to the GHA only.

Furthermore, an offer by the Treasury to wipe out the city's housing debt and another offer by the Scottish executive of an interest free loan of £300m to address GHA's cash flow problems - both conditional on the tenants voting in favour of the transfer - are described as "preferential" and in breach of the laws.

Daily describes the petition as "a deal breaker for the whole project" if the European parliament agrees, possibly resulting in direct intervention by the European Commission and bringing the proposal to a halt. Deans said: "Without the massive taxpayer subsidy, the GHA will have to shut up shop."

Sean Clerkin, chairperson of the Glasgow Campaign Against Stock Transfer, said: "We believe the executive is flouting EU competition law by throwing public money at a private company that is essentially a monopoly. It is at least questionable and quite possibly illegal."

The petition was submitted to Brussels as Glasgow Council housing tenants ended the first week of voting on the proposed transfer. Official estimates indicated that around half of the 80,000 tenants had already returned their votes. The result of the ballot is still expected to be announced on 5 April, since action by the European parliament will take months before a decision is made.

A spokesperson for the Scottish executive refused to comment until the executive's lawyers had examined the petition.