Mercosur countries Argentina, Brazil, Paraguay and Uruguay reached an agreement in principle with the 27-member European Union in 2019 after two decades of tough negotiations.
The EU has since proposed a "side letter" to the agreement with extra environmental requirements, rankling South American leaders who suspect protectionism was at work.
At a two-day summit in Puerto Iguazu, Argentina, Tuesday, Mercosur leaders hit back.
The latest proposal, said Brazil's Luiz Inacio Lula da Silva, "is unacceptable."
"Strategic partners do not negotiate on the basis of distrust and the threat of sanctions," he told the meeting.
"We are not interested in agreements that condemn us to forever be exporters of raw materials, mineral products and oil."
Argentine president Alberto Fernandez echoed this point, saying: "No one can condemn us to be suppliers of the raw materials that others industrialize and then sell to us at exorbitant prices."
Fernandez added the EU "presents us with a partial vision of sustainable development, focused excessively on the environmental" aspect.
Tuesday's heads of state meeting, following a gathering of ministers Monday, was also attended by the presidents of Uruguay and Paraguay Luis Lacalle Pou and Mario Abdo Benitez.
Also present was Luis Arce, the leader of Bolivia, which hopes to become a member of the Mercosur trade bloc.
- Counter-proposal -
The grouping, founded in 1991, represents 62 percent of South America's population and 67 percent of the continent's gross domestic product.
Its trade deal with the EU became held up under the 2019-2022 presidency of Lula's far-right predecessor Jair Bolsonaro, on whose watch Amazon deforestation surged.
While veteran leftist Lula has cast himself as the anti-Bolsonaro on environmental policy, he told European Commission head Ursula von der Leyen in June he had concerns over the additional environmental guarantees.
"No one in the world has the moral authority to discuss with us the issue of clean energy," Lula said in an interview with Brazilian public television shortly before the Tuesday's meeting.
The EU's top diplomat, Josep Borrell, acknowledged recently that the environmental proposals were not well received by the South American countries and said Europe was awaiting a concrete response.
Lula said his government was preparing a counter-proposal to take to Brussels, hosting a summit of the EU and the Community of Latin American and Caribbean States (CELAC) on July 17 and 18.
"It is imperative that Mercosur presents a rapid and forceful response," said Lula, who is taking over Mercosur's rotating presidency until the end of the year.
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