The EU's executive on Wednesday initiated against Hungary a never-before-used procedure that could see Budapest stripped of funding for flouting democratic standards.
The move comes just over three weeks after Hungarian Prime Minister Viktor Orban won re-election with an overwhelming majority.
The nationalist is frequently accused in Brussels of backsliding on democratic norms.
EU budget commissioner Johannes Hahn was given the greenlight to send a "written notification" to Hungary's government triggering the start of the rule of law mechanism, European Commission vice president Margaritis Schinas said.
A senior EU official said the move represented the "very first formal step" in the lengthy procedure and that Hungary would have two months to respond once it received the letter.
Overall the back-and-forth with Budapest could take nine months and any potential cuts to Hungary's EU funding would need to be endorsed by a super-majority of the bloc's 27 member states.
Brussels has repeatedly clashed with Hungary over its public procurement system, conflict of interests and corruption.
The conditionality mechanism was created in 2020, after a summit at the height of the coronavirus pandemic that agreed common borrowing to build an €800 billion pile of grants and loans for EU countries to recover.
Budget hawks, including Austria and the Netherlands, demanded the conditionality mechanism to put guard rails around the spending of taxpayers' money.
Hungary and Poland challenged the new procedure in the EU's top court. But, in February, the European Court of Justice gave the go ahead for its use, saying the European Union "must be able to defend those values".
The commission was under pressure from the European Parliament to apply the conditionality mechanism against Poland and Hungary. The legislature launched legal action to make the commission act.
"EU Commission has triggered the rule of law mechanism against Hungary," tweeted Green MEP Daniel Freund.
"Soon the funding for Orban's corrupt autocracy will run dry. FINALLY!!"
The use of the mechanism adds to a long list of other procedures the commission has taken over concerns against Hungary and Poland.