The European Commission has threatened legal action against the UK, saying a test of eligibility for benefits discriminates against foreigners.
It says it is easier for UK citizens to prove their "right to reside" - a test imposed by the UK for certain benefits - than EU nationals.
The commission says it may refer the case to the European Court of Justice.
UK ministers fear taxpayers could be forced into handing out more than £2bn to EU nationals - including so-called "benefits tourists" - if the UK has to comply.
Ministers say it is a "fundamental challenge" to the UK's right to decide its own social security arrangements.
The Commission says it has been in talks with the UK for several years over the issue and is responding to a "huge number" of complaints from EU citizens living in the UK.
