The European Commission plans to suspend 495 million euros ($US655 million) of EU funds for Hungary next year because of the country's budget deficit.
The sum represents 29% of Hungary's cohesion (development) fund allocation.
Hungary has until 1 January next year to improve its budget finances - otherwise the funds will be frozen.
A statement from the commission said the penalty is unprecedented.
Last month the commission threatened Hungary with legal action over new laws regarding the independence of its central bank and courts.