The European Parliament rejected the EU's €960 billion (£830bn) draft budget today.
Parliament president Martin Schulz said the block on the budget agreed by national ministers last month was "an important step for the European democracy."
The seven-year draft Multi-annual Financial Framework (MFF) includes a 3.3 per cent cut in the 27-member bloc's spending, the first in history.
MEPs rejected the budget by 506 to 161 with 23 abstentions.
A delay in agreeing the hugely complex spending agreements could hit funding for EU programmes such as the common agricultural policy next year.
The rejection is the first time the parliament has used powers to block the budget given to it in the hugely controversial Lisbon Treaty, which tried to put a democratic fig leaf over the capitalist club's operations.
MEPs expressed concern that the budget focused on rigid spending restrictions without allocating money for projects to promote growth in the ailing European economy.
"We do not believe in a crisis budget for seven years," insisted Conservative grouping head Joseph Daul.
MEPs want to add a clause allowing them to adjust the budget after the next European Parliament elections.
European United Left-Nordic Green Left group president Gabi Zimmer said the vote sent a clear signal to (the council of ministers) that they must respect Parliament's co-decision powers."
She said the MFF did not make it clear where funding to tackle "youth unemployment and growth and jobs" would come from.
Left MEP Alda Sousa added: "People are losing their dignity among levels of poverty that are obscene.
"This framework as it currently stands is going to sink us into eternal austerity."
The MFF is separate from national budgets and sets money aside for vast agricultural subsidies to rich farmers, infrastructure projects, research grants and diplomacy.
EU budget commissioner Janusz Lewandowski insisted negotiations should be launched swiftly to secure a budget.
"We owe this to 500 million Europeans, to our businesses, towns and regions, scientists, students, NGOs and all those who benefit from EU funds," he said.
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