The European Union is starting legal proceedings against the UK over Boris Johnson's plan to breach terms of its Brexit divorce deal and break international law.

"The commission has decided to send a letter of formal notice to the U.K. government," European Commission president Ursula von der Leyen announced in Brussels. "This draft bill is by its very nature a breach of the obligation of good faith laid down in the Withdrawal Agreement."

The pound dropped by 0.7% against the dollar on the news. The letter is the first step in a legal process that could result in a lawsuit at the European Court of Justice.

While the move is of little immediate consequence, it highlights that tensions are high as trade negotiations enter a critical phase, amid EU protests that the UK's Internal Market Bill violates the terms of the Brexit agreement.

The UK was expecting the letter and the European Commission sends dozens of such notices to member states each month, over various instances of alleged breaches of EU law. An exchange of letters and explanations follow, before some of these cases reach the EU's courts. Von der Leyen gave the UK one month to reply.

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Prime Minister Boris Johnson has risked a chaotic and bitter separation from the EU with his plan to introduce legislation that would override parts of the Brexit withdrawal agreement, which would be in conflict with international law.

Critics, including all five living ex-UK prime ministers, say the law will damage the UK's standing in other international disputes.

The Internal Market Bill cleared its final stage in the House of Commons on Tuesday and will move to the House of Lords, where Johnson's Conservative Party doesn't have a majority. Ministers expect the bill to be savaged there, according to people familiar with the matter.

Defeat for Johnson would deprive him of negotiating leverage in the final stages of trade negotiations with the bloc.

The bill had been seen as an attempt by the UK to get better terms from the EU by threatening the status of Northern Ireland. Without a deal, the UK will crash out of the bloc's single market and customs union on December 31, saddling businesses and consumers with additional costs and disruption.