"Strategic partners should have a relationship of mutual trust, not mistrust and sanctions," Lula told a joint news conference with European Commission head Ursula von der Leyen, after the two met in Brasilia.
The EU and the Mercosur nations -- Argentina, Brazil, Paraguay and Uruguay -- are trying to finalize a trade deal after reaching an agreement in principle in 2019 following two decades of negotiations.
But ratification by the EU's 27 members has stalled, notably over European concerns about Mercosur countries' environmental protections -- particularly in the Amazon rainforest, where deforestation surged under Lula's predecessor, far-right ex-president Jair Bolsonaro, in office from 2019-2022.
The EU has proposed a "side letter" with environmental guarantees.
But although veteran leftist Lula has cast himself as the anti-Bolsonaro on environmental policy, he was blunt in his reaction to the proposed additions to the agreement.
"I told president von der Leyen about Brazil's concerns," he said.
"It expands Brazil's obligations and makes them punishable by sanctions in case of non-compliance," he added.
He accused EU lawmakers of trying to legislate "outside their territory" with measures that "change the balance of the agreement."
However, von der Leyen voiced optimism the deal could be finalized by the end of the year.
"We have the tools to get it done as soon as possible," she said.
Brazil is von der Leyen's first stop on a Latin American tour that will also include Argentina, Chile and Mexico, a week after the EU put forward a new plan to bolster ties with the region.
Von der Leyen announced the EU would contribute 20 million euros to Brazil's Amazon Fund, a key Lula initiative to protect the rainforest.
She also pledged investment in anti-deforestation and renewable energy projects.
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