The Commission believes Italy's growth assumptions are overly optimistic making the debt reduction plan questionable
Italy has locked horns with Brussels over its fiscal plan for next year, which hikes the budget deficit to 2.4 percent of gross domestic product - in defiance of EU rules.
It's the first time the European Commission has effectively rejected a draft budget proposal by a member country.
Having recently emerged from the Greek debt debacle that nearly destroyed the single currency, the EU is concerned about another possible crisis if debt-laden Italy were to lose market trust.
The Commission has previously dealt with France, Spain, Portugal and past Italian administrations that broke EU fiscal rules, but none of those violations were as blatant as the latest Italian budget draft, the Commission said.
Euronews correspondent, Bryan Carter in Brussels, says the EU is prepared to take a stand with Rome over the budget.
"We saw that tensions between Rome and Brussels have been rising over the past few weeks," he explains, "and in their wording the Commission is prepared to get tough. It said - and I quote - "the Italian government is openly and consciously going against its committments".
In a letter to the Commission on Monday, Italy acknowledged that the draft violated EU rules, but said it would stick to its guns.