The European Commission plans to suspend 495m euros (£417m; $655m) of Hungary's EU funds next year because of the country's budget deficit.
The penalty is "unprecedented" for an EU nation, said a statement from the commission - the EU's executive arm.
The sum represents 29% of Hungary's cohesion (development) fund allocation.
Last month the commission threatened Hungary with legal action over new laws said to restrict the independence of its central bank and courts.
Hungary has until 1 January next year to improve its budget finances - otherwise the EU funds will be frozen.
The commission proposal would also have to be backed by the 26 other EU member states to be applied. The EU cohesion funds are designed to improve infrastructure and the environment in the EU's poorest regions.
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