Lastminute.com has been threatened with court action for failing to pay out refunds to some customers.
The company and the Competition and Markets Authority (CMA) had made a formal agreement which should have seen £7 million of payments made by the end of January to 9,000 customers.
However, the watchdog said £1 million owed to 2,600 customers remains outstanding.
It said that if the money is not paid out wining seven days, court action will be issued.
The CMA also found that the company failed to meet its ongoing commitment to repay all customers entitled to a refund within 14 days of their package holiday being cancelled on or after December 3.
Lastminute.com is also accused of telling some package holiday customers to go directly to their airline to get the cost of their flight back, in breach of package holiday rules.
To avoid court action, Lastminute.com must also ensure that customers who book their package holidays from now on will receive a full refund within 14 days, the watchdog said.
Andrea Coscelli, chief executive of the CMA, said: "It is wholly unacceptable that thousands of Lastminute.com customers are still waiting for full refunds for package holidays despite the commitments the company signed with us.
"We take breaches of commitments extremely seriously. If Lastminute.com does not comply with the law and pay people their outstanding refunds quickly, we will take the company to court."
Andrea Bertoli, Managing Director of Lastminute.com, said: "We sincerely apologise to all customers still waiting for their package holiday refunds and we are making every effort to resolve any remaining delays customers are facing.
"As of today, almost 50.000 package holiday customers have been refunded more than £40 million in the UK and £1.3 million pending.
"Despite all our efforts and commitment, we did not meet the CMA undertaking's deadline for this small proportion of customers because of the impact of the unforeseen third lockdown and Ryanair disrupting the refund process.
"We had already outlined to the CMA a detailed action plan to manage all pending cases and continue to work to get all customers repaid."
