The EU's parliament and its 27 member states agreed on Thursday to link the bloc's long-term budget to a mechanism requiring countries such as Hungary to uphold Europe's democracy rules, officials said.

The "provisional agreement" announced by the European Council overcomes the parliament's steadfast refusal to approve the 1.1-trillion-euro EU budget - and another 750 billion euro in virus relief - unless such a condition was applied.

With that issue resolved, haggling was now expected to take place on the finer details of working out allocations within the budget.

EU leaders agreed to the principle of rule of law conditionality when they held a marathon July summit that agreed the bloc's unprecedented virus bail-out package of grants and loans.

But MEPs complained that the provision was too vague to ensure that EU countries receiving bloc cash abided by democratic rules-- something fiercely opposed by Hungary, Poland and the Czech Republic.

Hungary and Poland have come in for scathing criticism from Brussels for moves seen to erode judicial independence and undermine rules on migration. 

Budapest has also been taken to task for allegedly persecuting opposition media and for forcing the closure of foreign-owned universities.

Germany, in its role holding the rotating EU presidency, had been irked by the European Parliament holding firm on the issue when the virus relief package urgently needed to be unblocked, especially with a second wave of the coronavirus sweeping Europe.

Its officials negotiated with the MEPs on behalf of the 27 member states to reach Thursday's agreement.

In a statement, the European Council said the agreed mechanism "allows to protect the EU budget where it is established that breaches of the principles of the rule of law in a member state affect or seriously risk affecting the sound financial management of the EU budget or the protection of the financial interests of the EU in a sufficiently direct way". 

Germany's envoy Michael Clauss called it "an important milestone in our efforts to finalise the next long-term EU budget and the recovery package".

He added: "We have a historic 1.8-trillion-euro financial package on the table. With the second wave of the pandemic hitting member states hard, there is no time to lose."