Bulgaria was punished for its persistent failure to tackle corruption and organised crime yesterday when it lost €220 million of funding from Brussels.

The penalty is the first of its kind for an EU member and will be seen as a severe warning to Bulgaria to fight the pernicious influence of the mafia. It comes as the European Commission considers whether to hand over the €11 billion aid bonanza that the country has been promised over the next six years as the prize for joining the EU in 2007.

Bulgaria had failed to clean up the agencies responsible for spending money on big infrastructure projects to prepare the country for EU membership, the Commission decided. This meant that the agencies would forfeit €220 million, which should have been spent by the end of this month. They stand to lose a further €340 million that has been suspended since the summer.

Alarm bells rang in Brussels after the arrest of the head of the Bulgarian roads agency for handing a €50 million contract to build a new highway to his brother. Since then investigations have started into 101 projects designed to modernise the country’s agricultural sector but which are suspected of falling into the hands of organised crime.

In one notorious case, an agency allegedly claimed for the cost of brand new tractors for a modernisation programme but actually bought scrap vehicles from the former East Germany, pocketing the difference.

The widespread evidence of corruption has only confirmed the worst fears of critics who thought that the EU was over-hasty in admitting Bulgaria and its neighbour Romania. Bulgaria has had about 150 contract killings over the past decade as rival mobsters fought each other. Not one has led to a conviction.

Olli Rehn, the EU’s Enlargement Commissioner responsible for pushing the case for entry, put a brave face on the troubles yesterday. “This is not the most pleasant day of my life. As they say, the man’s gotta do what the man’s gotta do,” he said.

“Bulgaria is an economic success story and a very committed and constructive EU member state, but there is another problem, which is the protection of taxpayers’ money and proper management of funds.

“We have to play by the book and respect the rules of financial management. Therefore there is, for the moment, no other option.”

Bulgaria responded to criticism from the European Commission last month by setting up a special unit of prosecutors to investigate mismanagement of EU money. It also passed the country’s first conflict-of-interests law and drew up an action plan. But its moves were deemed insufficient.

A Commission spokeswoman added: “Most of the measures are only a promise of future action and have not yet delivered concrete results.” The reaction from Sofia was one of disappointment mixed with defiance.

Gergana Grancharova, Bulgaria’s EU affairs minister, speaking to a Bulgarian news agency, said: “I cannot hide my disappointment with the negative decision of the European Commission regarding the two agencies. I expect to see the concrete arguments behind it.”

A spokeswoman for the Bulgarian government based in Brussels called the decision a disappointment given the country’s efforts to fight corruption. “We put a lot of effort in,” she added.

The next assessment of Bulgaria’s and Romania’s performance in the field of justice and home affairs will be made in two interim reports in February next year.

Two men were sentenced in Sofia on Monday for their part in corruption at the roads agency. One was jailed for five years and the other received a suspended sentence after they demanded a bribe of 50,000 Bulgarian Levs (£21,600) from the project architect for making changes that he wanted.

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