UPDATE 1-German conservatives eye compromise in EU row with Hungary, Orban defiant

Germany's conservatives proposed that the EU's centre-right grouping should suspend, not expel, Hungary's ruling Fidesz party on Wednesday, in a compromise aimed at defusing a bitter row over Budapest's commitment to democracy and the rule of law. But Prime Minister Viktor Orban's chief of staff said Fidesz would quit the European People's Party (EPP) rather than see its membership suspended, saying it was a question of national "dignity".

Orban, a feisty nationalist who has often clashed with the European Union over his anti-immigration campaigns and judicial reforms, was due to attend a meeting of the EPP committee in Brussels on Wednesday that will decide his party's fate. The head of the European Commission, Jean-Claude Juncker, and 13 sister parties in the EPP have called for Fidesz's expulsion, but Annegret Kramp-Karrenbauer, head of Germany's Christian Democrats, proposed a compromise ahead of the meeting.

"As long as Fidesz does not fully restore trust there cannot be normal full membership," Kramp-Karrenbauer told Reuters. A membership "freeze" would be an option, added Kramp-Karrenbauer, the frontrunner to eventually replace German Chancellor Angela Merkel.

Austria's Chancellor Sebastian Kurz and Bavaria's premier Markus Soeder, both EPP members, supported her position, sources close to Kramp-Karrenbauer said. But, as Orban's decision to attend in person what would normally be a routine administrative meeting demonstrates, the stakes are high: EPP membership for Fidesz confers mainstream respectability and influence that other populist parties lack.

Orban's chief of staff, Gergely Gulyas, signalled the prime minister would rather quit the EPP than accept suspension. "It is about the dignity of Fidesz and the country," Gulyas told state news agency MTI.

HEADACHE The decision poses a particular headache for Manfred Weber, the EPP's lead candidate in May's European Parliament elections, whose chances of succeeding Juncker as head of the executive Commission would be reduced without the votes of Fidesz's European lawmakers, of whom there are currently 12.

On Wednesday Juncker, who is also from the EPP, repeated his call for Fidesz to be kicked out of the grouping. "I think that Mr Orban is a long way from basic Christian Democratic values," he told German radio.

Juncker was the target of a Hungarian government poster campaign depicting him as a proponent of mass immigration into Europe and as a puppet manipulated by Hungarian-American billionaire philanthropist George Soros. The EPP grouping, the largest in the European Parliament, is also concerned over Orban's campaign against the private Central European University in Budapest that Soros founded.

Sources close to Weber said Orban had at least partially met the German conservative's conditions for keeping Fidesz in the EPP, including by apologising to colleagues in the grouping for labelling them immigration-backing "useful idiots". The sources said the EPP committee in Brussels would vote on Wednesday on proposals to deprive Fidesz of the right to vote in meetings of the grouping or to propose candidates for posts. Fidesz would also no longer be present at all meetings.

Weber also proposed that former European Council president and Belgian prime minister Herman van Rompuy could head a monitoring committee to evaluate Fidesz's cooperation with its sister parties, the sources added. (Additional reporting by Madeline Chambers in Berlin, writing by Thomas Escritt Editing by Gareth Jones)