US cable TV giant Comcast has made a formal £22bn bid for Sky that values the UK broadcaster at £12.50 a share.
The move threatens Rupert Murdoch's attempts to take full control of the pay-TV group.
The media mogul's 21st Century Fox has already agreed to buy the 61% of Sky it does not already own - an offer worth about £19bn.
Sky said it was withdrawing its recommendation for the Fox bid following Comcast's move.
Sky shares closed 3.4% higher at £13.59 - more than £1 above Comcast's offer, suggesting a bidding war for control of Sky could erupt.
Disney, which struck a $66bn deal with Fox in December to buy most of its entertainment assets, could also make a play for Sky.
Comcast - the biggest US cable TV firm that also owns the NBC network and Universal Pictures - said its bid offered a premium of about 16% to Fox's £10.75 a share offer.
Chief executive Brian Roberts said: "We have long believed Sky is an outstanding company and a great fit with Comcast. Sky has a strong business, excellent customer loyalty, and a valued brand."
Analysis: Simon Jack, BBC business editor
The gloves are officially off. The big winners here are the Sky shareholders who can now sit back and watch these two slug it out in a bidding war.
Now there is a better offer formally on the table, the board of Sky has duly retracted its recommendation to shareholders that they accept the Fox offer. We now wait for the Murdoch response.
The markets think there will be one as shares are trading £1 higher than the Comcast bid. The fight is already getting dirty, with teams of lawyers and PRs on both sides preparing briefing notes about each others previous misdemeanours, scandals and broken promises.
The bottom lines are these. A US company - either Comcast or Disney - will end up owning Sky. Over decades of string-pulling and empire building, Rupert Murdoch has usually got what he wants. But as he tries to dismantle it (in the most financially advantageous way possible) - it's not all going his way.
George Salmon, a Hargreaves Lansdown analyst.
"Part of the reason the value of the deal is significantly higher than what Fox originally put forward is that Sky has since secured three more years of rights to Premier League football at a reduced cost. As far as the value of Sky goes, that's a game-changer," he said.
"Sky has proven the Premier League deals are well worth the outlay. The group looks on course to deliver operating profits of £1.5bn this year, double what it earned ten years ago."
Comcast said it would continue to engage with Sky's independent directors to win a recommendation for its deal. In February it said it intended to make an offer at the same level of £12.50 a share.
Comcast added that it planned to agree several legally binding commitments with regard to Sky and in particular for Sky News, as well as keeping the group's Osterley headquarters in west London for at least five years.
Mr Roberts added: "With its 23 million retail customers, leading positions in the UK, Italy, and Germany, and its history of strong financial performance, we see significant opportunities for growth by combining our businesses."
He added: "We also understand the role that Sky plays in UK society and in its customers' lives and we are determined to be responsible and trusted owners of Sky."