EU leaders on Thursday reached an agreement with Poland and Hungary, resolving a dispute that will unblock the bloc's landmark post-coronavirus recovery plan.

"Now we can start with the implementation and build back our economies. Our landmark recovery package will drive forward our green and digital transitions," the president of the European Council, Charles Michel said in a tweet.

Leaders were looking to salvage the EU's €1.8-trillion budget and coronavirus recovery package, seen as vital for the continent's battered economies, after it was blocked by Hungary and Poland over provisions linking it to the respect for rule of law. 

Budapest and Warsaw are major recipients of EU budget cash, and the new mechanism was seen as a way by critics to slow a steady slide into authoritarianism in those countries.  

Both governments have been accused by Brussels of rolling back democratic freedoms, notably judicial independence in Poland and press and civil society freedoms in Hungary.

Germany, which holds the EU's rotating presidency, broke the logjam with a legal "declaration" that would provide countries further clarity on how the rule-of-law mechanism would work. 

Polish President Andrzej Duda said a provisional deal had been accepted by Poland and Hungary, but Berlin still needed to convince other member states worried that the compromise could water down the EU's values.