The EU Commission rejected Italy's budget proposal on Wednesday over mounting concerns about the country's level of debt, paving way for possible sanctions against the country.
Italy did not make sufficient changes to its proposed budget, which would continue to increase the country's debt.
"Our analysis suggests that the debt rule must be considered to have not been respected," the commission said in a report on Italy's debt, according to Ansa, an Italian news agency.
"We conclude that the opening of a procedure for excessive deficit based on the debt is therefore justified."
Deputy Prime Minister Matteo Salvini, who was negotiating with Brussels this week, stood by his budget, saying the government's fiscal targets were valid and he would not negotiate on them.
Speaking after Brussels rejected the budget he said: "We are convinced about the numbers in our budget. We will talk about it in a year's time."
He also said any EU sanctions against Rome would be "disrespectful" towards Italians.
Italy's Prime Minister Giuseppe Conte's budget would allow Italy's deficit to increase to 2.4 per cent of GDP next year.
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The ruling 5-Star Movement's plan did not listen to the EU Commission's call to reduce the debt, arguing that the deficit was needed to fund key pledges and revive growth.
EU rules say budget deficits should be below 3 per cent of GDP and public debt below 60 per cent of GDP.
Italy's debt is more than 130 per cent of GDP, but the country's leaders argue boosting growth is the best way to reduce this.
The European Union has the power to fine Italy through a process called excessive debt procedure.
Many countries have undergone excessive deficit procedures before, including France, Spain and Portugal, but received symbolic "zero" sanctions.
