The Commission said it had sent Hungary a formal notice that it would open an infringement procedure over the law, passed in December, which it said violated the union's democratic values and fundamental rights.
The Hungarian legislation violates EU laws on democracy and the equal rights of EU citizens, the data protection law and several rules applicable to the internal market, the Commission said.
"The setup of a new authority with wide-ranging powers and a strict regime of monitoring, enforcement and sanctioning also risks to seriously harm the democracy," a Commission spokesperson said.
The legislation came as nationalist Prime Minister Viktor Orban, who has clashed repeatedly with the European Union over democratic rights in Hungary, stepped up his party's campaign ahead of European Parliament elections next June.
Under the law, a separate authority to explore and monitor risks of political interference will be set up. It will punish banned foreign financing for parties or groups running for election with up to three years in prison.
Hungary has two months to reply to the letter of formal notice. If it does not address the grievances stated in the letter, the Commission may decide to send a reasoned opinion - a formal request to comply with EU law - as a next step in the procedure.
