The European Commission recommended on Wednesday that 13 billion euros ($13 billion) in EU funds for Hungary be frozen because Budapest is falling short on its commitments to meet European rule of law.
The EU executive said Hungary had in particular failed to make good on promised reforms to ensure a fair judicial system when it comes to prosecutorial decisions.
EU member states will now have until December 19 to vote on whether to back, reject or change the commission recommendation.
"Hungary has not progressed enough in its reforms," the commission said in a statement, noting that it had "failed to adequately implement" parts of the 17 remedial measures it had pledged to carry out by a deadline that ran out on November 19.
As a result, the commission upheld an earlier warning that it would suspend 65 percent of EU budget funding earmarked for Hungary, amounting to 7.5 billion euros.
Also, 5.8 billion euros from an EU coronavirus recovery fund was frozen until Hungary showed it was meeting 27 "super milestones" for its reforms, particularly on the judiciary issue.
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"The 'essential milestones' must all be met in full before Hungary can submit its payment request," commission Vice President Valdis Dombrovskis told a news conference.
"If they are not met, the entire payment would be blocked, and all subsequent ones too. In short: no funds will flow until the 'essential milestones' are properly implemented."
The commission's blunt recommendation was foreshadowed well in advance, with Hungary under repeated criticism by Brussels for perceived backsliding on principles and practices underpinning EU standards of democracy and law.
EU officials, however, indicated they were aware of the risk that Hungary might continue with blocking tactics on EU decisions requiring member state unanimity, a form of "blackmail" to try to ease the pressure from Brussels.
Budapest has already been standing in the way of efforts to extend sanctions on Moscow -- with which it has good ties and energy dependency -- over Russia's war in Ukraine.
It is also holding up EU adoption on a 15-percent corporate tax rate worked out in the OECD.
Hungary denies that its obstructionism is linked to the tussle over rule of law.
Yet those stakes -- and tactics -- will be on the table when EU ministers and leaders hold previously scheduled meetings over the coming weeks.
In a carrot-and-stick approach, the commission gave a positive assessment of Hungary's plan for the coronavirus recovery money, so that it can be unblocked -- but only if member states sign off on it before the end of December.
If that doesn't happen, under rules for that fund, Hungary would lose 70 percent of the grants set aside for it.