Hungary, Poland dig in heels in row with EU over budget, rule of law

* Hungary, Poland are blocking EU budget, recovery fund

* PM Orban remains opposed to linkage of cash, principles

* Poland, in U-turn, says its stance also unchanged

BUDAPEST, Dec 4 (Reuters) - Hungary and Poland dug in their heels on Friday in a dispute with the European Union over efforts to link the disbursement of 1.8 trillion euros of funds with rule-of-law provisions, dashing tentative hopes that a compromise could soon be agreed.

Hungary and Poland have for weeks blocked the release of funds from the EU's seven-year budget and a post-COVID development fund, cash sorely needed by member states trying to emerge from their coronavirus-induced recession.

Warsaw and Budapest, both under investigation by the EU for undermining judicial and media independence, object to the bloc's attempt to make the funds conditional on respect for the rule of law and democratic norms.

Poland's Deputy Prime Minister Jaroslaw Gowin said on Thursday an acceptable compromise could be for EU leaders to issue a declaration that assured Warsaw and Budapest that the mechanism would only be used to safeguard EU funds and not to exert pressure in other areas of policy.

However, on Friday both countries rejected that idea.

"For us, this solution - attaching some statement like a reminder on a sticky note attached on a piece of paper - won't work," Hungarian Prime Minister Viktor Orban told public radio. "Hungary insists that these two things should be separated."

Polish Prime Minister Mateusz Morawiecki backed him.

"We say clearly that we are not able to accept the budget for the next seven years if at the same time that regulation is adopted. Our partners see that our position does not change," Morawiecki told a news conference.

BUDGET CUTS?

Orban said there was no rush to get an agreement on the EU budget this year, adding: "Leave the legal status quo unchanged and everything will go smoothly and quickly."

No agreement on the 2021-2027 budget framework would mean the EU switching to emergency financing - known as 'provisional 12ths' because in each month the bloc would not be able to spend more than 1/12th of what it spent in the previous year.

The European Commission has said that would entail radical cuts in the amount of money that EU budget beneficiaries such as Poland and Hungary receive.

To avoid that scenario and to be prepared for when the two countries lift their veto, EU governments and the European parliament agreed on Friday on an annual budget for next year based on the now still vetoed 2021-2027 framework.

The chairman of EU leaders, Charles Michel, said on Friday the bloc could not compromise on respect for rule of law, which he said was in its DNA, though he "wanted to remain optimistic" that the standoff can be resolved quickly.

Portugal, which takes over the rotating six-month EU presidency from Germany next month, said it was unacceptable for two countries to block a decision that was very important for the EU as a whole on such a premise.

($1 = 0.8226 euros) (Additional reporting by Krisztina Than in Budapest, Alan Charlish in Warsaw and Jan Strupczewski in Brussels; Editing by Gareth Jones)