"This unprecedented step follows the commission's repeated warnings to Hungary urging it to step up its efforts to end the country's excessive government deficit, and its subsequent failure to take appropriate action," the commission said in a statement.
The commission said it would withhold a third of Hungary's European Union subsidies if it did not meet its financial targets.
That would cut $655.8 million out of Hungary's subsidies, the EUobserver reported Wednesday.
The commission said Hungary must make "structural" changes in its finances, rather than making a one-time adjustment.
The country has not had its deficit below the 3 percent threshold since 2004, the year it joined the European Union, the EUobserver reported.
In a response from Budapest, "Our government regards it as an unfounded and unfair proposal," government spokesman Peter Szijjarto said.
Szijjarto said the threat of sanctions was "unfathomable," given the public deficit was under the 3 percent target in 2011, "and will remain so this year as well."