By Silvia Aloisi

MILAN (Reuters) - The European Union must choose between letting Rome hike its budget deficit to cope with the costs of migrants and an earthquake, or siding with the "Hungarian way" of building barriers, Italy's economy minister said.

The Italian government has been stepping up anti-Brussels rhetoric after announcing an expansionary 2017 budget plan on Oct. 15 ahead of a referendum on constitutional reform that may decide Prime Minister Matteo Renzi's political future.

"Europe must choose which side to take. They can accept the fact that our deficit goes up from 2 percent to 2.3 percent (of gross domestic product) to tackle the earthquake and the migrant emergencies," Pier Carlo Padoan told la Repubblica daily in an interview on Sunday.

"Or they can choose the Hungarian way, which puts up walls against the migrants and must be rejected. That would be the beginning of the end."

The budget raised previously agreed targets for the budget deficit and the public debt, with Rome insisting it needs leeway to deal with the migrant crisis on its Mediterranean borders and reconstruction after the August earthquake.

The European Commission is considering sending Rome a letter warning against breaking the bloc's budget rules, officials have said. Italian newspapers said the letter could arrive on Monday.

Fitch Ratings agency cut its outlook for Italy on Friday, saying weak growth, high debt and the uncertain outcome of the Dec. 4 referendum posed risks to the euro zone's third-largest economy. Fitch said Italy's track record of "repeated delay and back-loading of fiscal consolidation reduces credibility."

Padoan said Italy had spent more money than any other European state on migrants and refugees.

"So far no one has recognized our financial commitment ... It's a political problem, that concerns the future of the continent," he said.

In an interview with state television, Renzi said Italy was not arguing with Europe over a few decimal points of budget deficit but wanted Brussels to sanction eastern European countries who rejected migrants.

"Italy today contributes 20 billion euros to the EU budget and gets back 12 billion euros. What we are saying to our European friends is: can we at least make sure that the countries who take the money also take in the migrants?

"We help rescue people at sea, while eastern countries who had walls and the iron curtain, who were rescued by Europe, now shut the door and put up walls... this for me is unacceptable, and it applies to Hungary as well as many others."

Shrugging off the threat of a formal European Commission warning, he said the budget plan would be submitted to parliament this week, after opposition parties complained of a delay.

Renzi was even more defiant on Friday, saying he will not be swayed by EU "technocracy" and will not change the budget law.

Opinion polls suggest Renzi may lose the referendum on his plan to reduce the role of the Senate and centralize decision making. But he has packed the budget with potentially vote-winning measures.

(Reporting by Silvia Aloisi; Editing by Ros Russell/Rut Pitchford)