The European Commission could freeze hundreds of millions of euros in assistance for Bulgaria next week after a leaked report highlighted spending irregularities, corruption and organised crime.
The situation has undermined the use of EU funds and could hinder Sofia's entry into the Schengen passport-free area and the euro currency zone, according to diplomats.
"Bulgaria is not able to reap the full benefits of this [EU] assistance because of critical weaknesses in administrative and judicial capacity," the draft report said, news agencies reported on Friday.
"High level corruption and organised crime exacerbates these problems of general weakness."
The European Commission report, which has been described by EU officials as the most scathing ever written about a member state, is due to be published on Wednesday and could be amended before then.
Bulgaria joined the European Union in 2007, along with neighbouring Romania, on the condition that it clamp down on corruption and organised crime.
But while the European Union says that Romania has made progress in those areas, Bulgaria has not.
"Bulgaria is a very clear case," one EU official said.
"You can do a simple test: How many [organised crime] prosecutions have there been? The simple answer is: there haven't been any," said the official, who spoke on condition of anonymity.
Two EU officials said that almost $1 billion of aid was at stake. They said how much could be suspended remains an open question.
Johannes Laitenberger, the chief European commission spokesman, confirmed on Friday that the EU executive is looking at EU spending in Bulgaria, but stressed "there will not be a finalised report" until Wednesday.
Last month, the European commission froze about $190,000m in agricultural aid to the country, citing spending irregularities.
That decision was the "direct result of an investigation by the EU's anti-fraud
office," Michael Mann, the EU spokesman, said.
Plea for leniency
Sergei Stanishev, the Bulgarian prime minister, pleaded for leniency and cautioned the EU that a wholesale freezing of its funds would only alienate many Bulgarians.
In a cabinet shuffle in April, Stanishev named Meglena Plugchieva as deputy premier in charge of EU spending in Bulgaria.
The former envoy to Germany has reorganised government agencies, launched a debate about overhauling Bulgaria's public procurement laws and created a blacklist of companies involved in irregular spending of EU funds.
Plugchieva was in Brussels on Friday to discuss the matter with EU officials.
"I do not share the opinion that Bulgaria should somehow be put in a category of second class member of the EU," she said.
Meglena Kuneva, Bulgaria's EU commissioner in Brussels, has avoided commenting directly on the EU spending issue.
"Bulgarians are very ambitious, and they will get things right," she said this week.
However, the draft report was leaked as a survey in Bulgaria showed that public confidence in the government, police, army and judiciary is waning rapidly and stands at its lowest ebb since the country joined the EU.