The European Commission has warned Romania to halt the export of children for adoption or face a bar on EU membership and the severance of aid funds.
The commission wrote to Adrian Nastase, the prime minister, warning that his government's conduct failed to meet the "political criteria" on human rights required for EU accession. Romania is hoping to join in 2007.
The unprecedented letter, signed by Gunther Verheugen, the enlargement commissioner, not only threatened to cut off aid but also referred to the need for a "recovery of funds" already spent unless Bucharest can account for its actions.
Officials say £42 million of aid is at risk.
The dispute comes after Italian reports that Romania had sent 105 children to Italy on dubious pretexts, confirming suspicions in Brussels that the Nastase government is turning a blind eye to racketeering by adoption agencies and corrupt officials.
Romania imposed a moratorium on adoptions in 2001 at the request of Lady Nicholson, a Liberal-Democrat MEP and the European Parliament's "rapporteur" on Romania. She said organised crime was exploiting reports about the country's orphanages as a "cover" for a much wider child-abuse industry.
More than 30,000 children were shipped out for adoption over 10 years, generating hundreds of millions of pounds for agencies and middle men. Each child fetched £20,000 to £35,000.
Few were actually orphans and some were stolen babies. Last month it was disclosed that a maternity hospital at Ploiesti had been tricking mothers by pretending their premature babies died at birth.
The infants were in fact "fattened" in a pre-natal wing for six months before being exported. It is claimed that 23 babies were smuggled out by the hospital last year alone.
In other cases, vulnerable young girls were pressured into giving up their babies for as little as £300 cash.
Lady Nicholson said little had changed since the moratorium was imposed. "It is a well-oiled machine that seems to rest on a partnership between the adoption agencies and corrupt officials, from top to bottom of the administration. There are wonderful people making huge efforts to stop it but they are not winning.
"The courts appear to be corrupt. One judge rubber-stamped 92 cases in a single morning. There are no files. Children are just a number in a computer. The agencies get a court order and grab the child. It's kidnapping.
"Some are girls and boys approaching puberty. They are sent off against their will to an unknown future. I shudder to think of their fate. You see advertisements on the internet for pre-pubescent virgins with a $30,000 price tag."
Outraged Euro-MPs are demanding that Romania's request to join the EU be put on ice. A draft resolution by the European Parliament calls for "root-and-branch reform of the justice system" before renewing accession talks.
According to official figures, 1,000 Romanian children have been adopted abroad over the last two years but the real number could be much higher.
Mr Nastase said they were "pipeline cases" dating from commitments back to 2001, claiming that foreign parents were already living with the children in Romania.
But Mr Verheugen disputed the claim, noting that most were taken from foster homes or "other suitable care situations" in Romania.
An EU official said: "They were happily settled. Romania is a poor country and so these families don't have swimming pools in the yard but foster care is no worse than in any other country."
While most adoptive parents in the EU and America offer loving homes, the Commission said lack of tracking data made it impossible to know where children ended up.
"There is a very big risk that a number fall into the hands of paedophile networks. I didn't believe it for a long time but all the evidence points that way," said an official.
Romanian officials say they are caught in a tug-of-war between two camps. While one part of the EU demands an adoption ban, Italy, Spain, and France want laxer rules to meet their collapsing fertility rates.