The EU launched legal action against Hungary on Thursday over a crackdown on foreign-backed civil society groups that critics say targets US billionaire George Soros.
The move came hours after the government of Prime Minister Viktor Orban said it would end a poster campaign attacking Soros that has been accused of anti-Semitism.
Brussels also announced that it is advancing a separate case over an education law that could shut a Soros-backed university, risking a fresh confrontation with Orban.
"We have studied the new law on NGOs carefully and have come to the conclusion that it does not comply with EU law," European Commission Vice President Frans Timmermans said.
"We await a reaction from the Hungarian authorities within a month," after which the matter could go to the EU's top court, he said.
The Hungarian government said it would "not bow to pressure from the EU."
Hungary's parliament approved the law last month which will force groups receiving more than 24,000 euros ($26,000) annually in overseas funding to register as a "foreign-supported organisation", or risk closure for non-compliance.
They will also have to use the label "foreign-supported organisation" on their websites, press releases and other publications.
Orban's government says the measures are aimed at improving transparency as well as fighting money laundering and terrorism funding.
Hungary's deputy justice minister Pal Volner said in a statement said the government would "represent Hungary’s interests with every means possible".
"We regard it as extremely revealing that it is precisely those political activist groups that are refusing to conform to the new law and to register that receive a significant part of their funding from George Soros's network."
Rights groups however hailed the EU decision.
"Today's action from the European Commission sends a strong signal that such onslaughts against civil society are not acceptable in the European Union," Amnesty International's Iverna McGowan said.