Romania failed to make sufficient progress in implementing promised economic reforms in exchange for rescue funds, the European Commission said in a statement late Friday after a meeting in Bucharest.
"Important steps have been taken in some areas and the macroeconomic situation is strong," said the Commission.
"However, the overall progress in implementing the jointly agreed policy measures has not been sufficient, predominantly in relation to fiscal policy, to allow for a staff-level agreement with the Romanian authorities," it added.
Romania only managed to claw out of a deep recession after the EU and the IMF agreed to a bailout programme of 20 billion euros in 2009.
In 2013, it concluded a new deal of two years that opened a credit line of 4 billion euros that it could tap on in case of a serious crisis. In return, it agreed to take on certain economic reforms.
But the Romanian parliament on Wednesday adopted a new tax code that slashes value-added tax from 24 percent to 19 percent from 2016 despite its creditors' warnings of its impact on the state's budget.
Although the measure appears to be aimed at stimulating consumption, it is also expected to result in 2.6 billion euros in lost VAT revenues.
The public deficit for 2016 is therefore now expected to reach 2.8 or 2.9 percent, instead of the 1 percent that the government had earlier forecast.
The IMF's representative to Romania, Guillermo Tolosa, said, "Finding measures to fill that gap is very important," but he conceded that it would also be "very difficult".
Finance Minister Eugen Teodorovici said after the meeting with EU auditors that a decision concerning whether to carry on with the bailout would be made at the next EU finance ministers meeting on July 14.