Scottish First Minister Nicola Sturgeon wants to make self-identification for trans people easy and feelings-based rather than factual.
The UK government says the Bill, passed by 86 votes to 39 in the Scottish Parliament last month, is a threat to the Equalities Act across Great Britain.
Scotland's First Minister Nicola Sturgeon called the move a "full-frontal attack" on the Scottish Parliament and vowed to oppose it.
She said the Scottish ministers would "defend" the bill, warning if the veto succeeded it would be the "first of many".
The Scottish government is expected to challenge the ruling - potentially through a judicial review - but is waiting for more details from UK ministers.
Nicola Sturgeon's opponents are deeply concerned about the impact on women’s sex-based rights.
The UK government's Scottish secretary Alister Jack sent a letter to Sturgeon claiming the bill would “have a "significant impact" on protections contained in UK equalities legislation.”
He cited concerns over its effect on legal rights to run single-sex clubs, associations and schools, as well as rules on equal pay for men and women.
He added that having "two different gender recognition schemes in the UK" risked creating "significant complications," including "allowing more fraudulent or bad faith applications".
Never before have the UK government taken such measures to block a Scottish bill.
This decision turns a dispute about the process for legally changing gender into a significant constitutional clash between the Scottish and UK governments.
The dispute is likely to end up in court.
Binary spokeswoman Kirralie Smith said the Scottish bill represents bad law.
“Identity is based on feelings, not facts,” she said.
“Law must be rooted in facts to be fair and applicable to all citizens. It is outrageous that politicians in Scotland intend to wipe out women’s sex-based rights by elevating the feelings of a minority that is based on fantasy.
“No one can change their sex, it is absurd to even entertain such a notion.
“To make it law is simply ridiculous, and the intervention by the UK government is necessary.”
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