Angel Dzhambazki raised his right hand after speaking in a debate on the rule of law in Poland and Hungary.
A Bulgarian MEP has denied making a Nazi salute in the European Parliament on Wednesday claiming it was "an innocent wave".
Angel Dzhambazki, of the Eurosceptic ECR group, made a gesture after speaking in a debate on the rule of law in Poland and Hungary.
The debate followed a ruling from the European Court of Justice (CJEU) that the bloc's conditionality mechanism over EU funds is lawful.
The ruling opens the door for the EU Commission to withhold EU money to member states that are found to be violating the bloc's core values including rule of law, judicial independence, and press freedom.
A majority of MEPs had called on the Commission to trigger the mechanism over Hungary and Poland, butDzhambazki, of Bulgaria's nationalist IMRO party, described the ruling as an "abomination" on Twitter.
"We will never allow you to tell us what to say and what to do. Long live Bulgaria, Hungary, Orban, Fidesz and the Europe of nation-states," he told the parliament in Strasbourg.
The European Parliament has launched an internal investigation into possible sanctions against Dzhambazki.
The EU institution's President, Roberta Metsola, reacted to the incident on Twitter, writing that "a fascist salute in the European parliament is unacceptable to me — always and everywhere."
"It offends me and everyone else in Europe. We stand for the opposite. We are the House of democracy.
"That gesture is from the darkest chapter of our history and must be left there," she added.
Metsola later confirmed that an investigation into the gesture had been officially launched.
The vice-president of the European Parliament, Pina Picierno, who was leading the debate at the time, tweeted that she "condemned what had happened and asked for this ignoble and unacceptable gesture to be sanctioned".
The European Parliament's rules of procedure state that MEPs "shall refrain from any inappropriate behaviour" and "any offensive remarks". Failure to comply with these rules can result in sanctions such as loss of participation in parliamentary activities or loss of allowances.
The centrist Renew Europe group also took to Twitter to "condemn this appalling insult to the victims of fascism, in the house of European Democracy."
"We call on Mrs Metsola, EU Parliament President, to act," they added.
The centre-left Socialists & Democrats group wrote that "fascist symbols are unacceptable in this House because this is the home of EU citizens, but it's also a living monument that represents the victory of Europeans against the barbarism of Nazi fascism."
'It was an innocent wave'
Video footage shows Dzhambazki walking up the steps towards the exit of the parliament chamber, before turning around and holding out his right arm before walking away.
Dzhambazki, however, told Euronews that "this unfortunate event is a simple case of gross misunderstanding".
In a letter he sent to his fellow MEPs, he defended himself against what he said constitutes "libel and defamation" and said he met the accusations he had made a Nazi salute "with a healthy dose of disbelief, I was actually shocked."
"The situation was rather simple. I was in the hemicycle finishing my speech at which admittedly I said something with which many of you disagree thus provoking you."
"As I was leaving the hemicycle I wanted to apologise for the later (sic) by humbly waving to the chair. Imagine my surprise when as a consequence of this wave I was accused of doing a Nazi salute," he wrote.
"I apologise if my innocent wave (which actually was meant as an excuse) has insulted anyone," he added.
The ECR political group, to which Mr Dzhambazki belongs, said in a statement on Thursday that it took the accusations against him "very seriously".
"We are conducting an internal investigation and await the decision of the European Parliament on this matter," the group added.
Who is Angel Dzhambazki?
It is not the first controversy that Dzhambazki has faced.
Authorities in the neighbouring Republic of North Macedonia officially complained to Sofia last year after he described the country's government "as the temporary rulers of our Macedonia" in a campaign video released on his Facebook page.
He also sent a letter to then-North Macedonia Prime Minister, Zoran Zaev, in which he stated that "Macedonia is Bulgarian."
He has also accused the European Parliament of being "devoted to LGBT propaganda", adding that he rejects "homosexual propaganda, as well as actions close to paedophilia" and condemned the Istanbul Convention against domestic violence stating it "destroys the Christian family and traditional values, consisting of a man, woman and their children". He said that "everything else is a perversion and gender propaganda".
Dzhambazki's IMRO party finished ninth in last November's parliamentary elections and failed to reach the 4% threshold necessary to gain seats.
In 2019, the Bulgarian MEP was also accused of having made xenophobic remarks about two other MEPs, French MEP Karima Delli and German MEP Ismail Ertug, which he disputed.