BT has been told it must invest more in the business responsible for most of the country's broadband roll-out - or face the prospect of having the unit taken off its hands.
MPs criticised the quality of service offered by BT's Openreach, and said it must put its "house in order".
Lawmakers added that the firm could be pumping hundreds of millions of pounds more into the vital infrastructure.
BT rejected that allegation, but agreed that customer service needed improving.
"Openreach investment is 30% higher than it was two years ago and it will grow again this year," the telecoms giant said.
"Separating Openreach from BT would lead to less investment, not more."
The report by MPs on the Culture Media and Sport Committee accuses BT of making decisions over Openreach - which provides its rivals with access to its broadband networks - that favoured its own "priorities and interests".
The committee is "demanding" that BT pump significantly more money into Openreach.
However, BT said it was "disappointed to be criticised for having invested more than £1bn a year in infrastructure when the UK was emerging from recession and rival companies invested little".
BT had, it said, "committed to invest a further six billion pounds over the next three years".
The MPs said they supported they idea of splitting Openreach from BT, if it failed to "offer the reforms and investment assurances necessary to satisfy our concerns".
In that event, the committee added, Ofcom should "move to enforce full separation of Openreach".
BT said it was in talks with Ofcom about "increasing the autonomy" of Openreach.
Criticism of Openreach from MPs will add pressure on Ofcom to make a decision about the future of the telecoms company.
So far, the telecoms watchdog has stopped short of demanding the network infrastructure firm be split off from its parent, opting instead for talks with BT about how it can make Openreach more independent.
It is unclear how these talks are progressing, but Ofcom is expected to make a final decision imminently.
One of the biggest questions it will have to ask is whether Openreach's ambitions are big enough. Reports suggest that the European Union wants every household in its bloc to have access to 100Mbps (megabits per second) broadband within a decade, something BT would currently struggle to provide in a lot of rural areas.
For its part, BT is keen to prove that it is getting its house in order and has just announced improvements in the time it takes customers to get an appointment for an Openreach engineer to repair or install broadband.
Ian Lucas, a member of the committee, told the BBC that Openreach had a "monopoly" in provisional broadband services many parts of the country.
"There is a long queue for people who want broadband.
"It will be very familiar to those of us who remember the 1980s waiting for a phone line - it's a similar situation, weeks, sometimes months waiting for a fibre connection through Openreach and there is nowhere else to go," he added.
Rival companies have long called for a split between BT and its Openreach operation, which runs its cables, fibre and network infrastructure.
Companies such as Sky, Vodafone and TalkTalk, who pay to use the network, have claimed in the past that BT underinvested in Openreach, leading to a poor service with interruptions and slow speeds.
The MPs said the shortfall in investment in Openreach arose because BT appeared to be "deliberately investing in higher-risk, higher-return assets such as media properties, and not investing in profitable lower risk infrastructure and services through Openreach".
TalkTalk's chief executive, Dido Harding, welcomed the MP's findings. "This report puts beyond doubt the need for radical reform of Openreach. MPs have concluded that Openreach is not fit for purpose and is letting Britain down.
"As Ofcom considers how to improve Britain's broadband, it should feel emboldened to know it has cross-party political support to be radical," she said.
BT said while it agreed service levels have to improve, it was making progress in tackling the problem. "Thousands of engineers have been recruited and we are fixing repairs and installing new lines quicker than before.," it said.
Welcoming the report, consumer organisation Which? said: "Ofcom must move quickly to make sure Openreach genuinely improves service."
Its director of policy and campaigns, Alex Neill, also said the industry should automatically compensate consumers when things go wrong with telecoms and broadband.