On Monday, Italy had said it would stand by its budget and refuse to cut spending, undeterred by its debt reaching 130% of GDP.
That level of debt is more than twice the European Union limit of 60% and second only to Greece.
European Commission vice president Valdis Dombrovskis said: “Today for the first time the commission is obliged to request a euro area country to revise its draft budgetary plan, but we see no alternative.”
Italy could have faced being fined by the bloc but instead has been told that it must draw up a new budget within three weeks, according to Italian news agency AGI.
Mr Dombrovskis said: “Experience has shown time and again that higher fiscal deficits and debt do not bring lasting growth.
“And excessive debt makes your economy more vulnerable to future crisis.”
He said that if Italy did not change its budget within three weeks, the commission was prepared to launch a disciplinary process, based on the lack of progress in cutting debt.
Italy had only avoided this process earlier in the year because of its “broad compliance with its commitments” but the current budget was a “material change” from those commitments, Mr Dombrovskis added.
The news comes after a long dispute between Brussels and Italy’s government of the right-wing League and
anti-establishment 5-Star Movement over the budget.
In July, the EU asked Rome to cut its structural deficit, excluding one-offs and business cycle swings, by 0.6% of GDP.
The plan rejected by the commission had increased that deficit by 0.8% of GDP.
Italy had defended the plans, saying hard decisions needed to be taken to encourage growth, but the EU had warned against such a high amount of spending for a country whose economy is already struggling.