Polish Prime Minister Mateusz Morawiecki has accused the EU of blackmail in a heated debate with European Commission chief Ursula von der Leyen over the rule of law.
The clash in the European Parliament follows a top Polish court ruling that rejected key parts of EU law.
Mrs von der Leyen said she would act to prevent Poland undermining EU values.
In response, Mr Morawiecki rejected "the language of threats" and accused the EU of overstepping its powers.
Poles overwhelmingly support being part of the EU, opinion polls suggest, but Poland's right-wing nationalist government has increasingly been at odds with the union on issues ranging from LGBT rights to judicial independence.
The latest row has come to a head over an unprecedented and controversial ruling by Poland's Constitutional Tribunal that in effect rejects the core principle that EU law has primacy over national legislation.
The case, brought by the Polish prime minister, was the first time that an EU member state's leader had questioned EU treaties in a national constitutional court.
'A direct challenge'
On Tuesday, Mrs von der Leyen told the European Parliament that the European Commission - the EU's executive - was "carefully assessing this judgement".
She said the situation had to be resolved, but she was adamant: "This ruling calls into question the foundations of the European Union. It is a direct challenge to the unity of the European legal order."
Vowing to take action, Mrs von der Leyen set out three ways the European Commission could respond to the Polish court judgement.
The options, she said, were legally challenging the court ruling, withholding EU funds and suspending some of Poland's rights as a member state.
The European Commission is yet to approve €57bn (£48bn; $66bn) of Covid-19 recovery funds earmarked for Poland, and may not do so until the dispute is settled.
In a speech that ran over his allotted time, Mr Morawiecki said Poland was "being attacked" by EU leaders and it was "unacceptable to talk about financial penalties".
"Blackmail must not be a method of policy," said Mr Morawiecki of Poland's ruling conservative-nationalist Law and Justice party.
Difficult problem for EU to solve
A correspondent strap for Jessica Parker
Seeing this fiery debate in Strasbourg, you might wonder whether this so-called Polexit is a real prospect - given that it appears there are two very different legal, political and cultural perspectives set on a collision course.
But the resounding answer amongst those I've spoken to is no.
On the EU side, one diplomat recently told me they believed the EU couldn't survive another exit.
So there are huge political calculations to weigh up here, as well as legal ones.
President von der Leyen is under mounting pressure to take action. It's a major test of her presidency.
You could see on Tuesday she wished to impress upon MEPs she was ready, if needed, to take a tough line. Yet last Friday, outgoing German Chancellor Angela Merkel appeared to urge compromise over confrontation.
There is an argument to say that, if the EU opted for strong action, it could just serve to escalate the crisis and push Poland further away.
But, if it decides on a more conciliatory course, does the bloc look weak and undermine its entire legal basis?
Mr Morawiecki said the Polish court ruling on 7 October had been misunderstood and only questioned one area of EU treaties.
He said EU treaties must not threaten a member state's constitution, which outline laws and principles that specify how a country should be governed.
The Polish court ruling and the European Commission's response to it has divided opinion among the political leaders of EU member states.
Luxembourg's Foreign Minister, Jean Asselborn, said the clash threatened the existence of the EU, while Germany's Minister for European affairs, Michael Roth, said the union must not compromise on its founding values.
But Lithuanian President Gitanas Nauseda said linking issues about the rule of law to funding risked inflicting "unimaginable harm to European Union unity".
Mr Nauseda offered to mediate EU talks after a meeting with Polish President Andrzej Duda.
PM downplays Polexit fears
The tribunal ruling has raised concerns that Poland - like the UK - could exit the EU in a so-called Polexit. But Mr Morawiecki has repeatedly insisted the country has no plans to leave the union.
"We should not be spreading lies about Polish Polexit," he told the European Parliament.
ANALYSIS: Polish court ruling stokes fears of Polexit
Unlike the UK before its Brexit referendum in 2016, support for membership of the EU remains high in Poland. Mass protests have been held by Poles who back remaining a member.
Earlier this month, more than 100,000 people gathered in the capital, Warsaw, to show their support for Poland's EU membership.
At one rally, Donald Tusk, former president of the European Council and now leader of the opposition party Civic Platform, called on people to "defend a European Poland".