Capita beat Serco in June to win the contract in a major boost to the company which is being restructured by its new chief executive, Jonathan Lewis.
Serco confirmed that it was taking legal action over the contract but declined to comment any further. Capita said it remained fully committed to the contract and would continue to work with the MoD on the matter.
"The contract award has been suspended until the legal challenge to the procurement is resolved," a MoD spokesman said. "It is not uncommon for there to be procurement challenges."
The government said in June that the contract would deliver a more modern and agile service and added that it had made robust assessments of the financial health of its suppliers.
The Financial Times reported in June that Capita was given the highest possible risk rating in an internal ministry assessment, shortly before being handed the new contract.
The award of the contract had provoked a sharp rebuke from trade union Unite, which said key services including those in war zones should not be farmed out to private companies.
The fire contract was the first major deal awarded by the government since the collapse of Carillion, a construction and outsourcing partner to the government which went out of business in January, rocking the sector.
Its demise has prompted Britain to look at tightening contract terms for private companies operating in the public sector over the next 12 to 18 months.
Capita, which provides technology-led services for the public and private sector, has also run into problems after chasing contracts on slim margins, resulting in a string of profit warnings and a rights issue.
Capita said it had won the MoD tender following a rigorous evaluation process. "Capita remains fully committed to the future delivery of the Defence Fire and Rescue Project and will continue to support the MoD on this matter," it said.
(Reporting by Arathy S Nair in Bengaluru and; Kate Holton in London; Editing by Keith Weir and Louise Heavens)
