(BRUSSELS) - The European Commission will condemn Bulgaria's corrupt administration and judiciary in a scathing report next week on Sofia's handling of EU funds, according to draft text seen Friday.

The flaws have undermined its use of the money -- hundreds of millions of euros have already been frozen -- and could also hinder Sofia's entry into the Schengen passport-free area and the euro single currency zone, diplomats said.

The criticism comes as a new survey in Bulgaria showed that public confidence in the government, police, army and judiciary is waning rapidly and stands at its lowest ebb since the country joined the EU in January 2007.

"Bulgaria is not able to reap the full benefits of this (EU) assistance because of critical weaknesses in administrative and judicial capacity," said the draft report on Sofia's management of funds from Brussels.

"High level corruption and organised crime exacerbates these problems of general weakness," said the text, which could be modified before it is released in Brussels on Wednesday.

"Urgent action is needed because deadlines for contracting some of the funds are approaching, after which the funds will be lost to Bulgaria," it said.

It urges Sofia "to cleanse its administration and ensure that the generous support it receives from the EU actually reaches its citizens and is not siphoned off by corrupt officials, operating together with organised crime."

Bulgarian Vice-Prime Minister Meglena Plugchieva -- whose role overseeing EU funds in Bulgaria was created as a response to criticism from abroad -- admitted on Friday her country had not fully done its "homework" in fighting corruption, though she said the EU was conjuring up "horror scenarios".

"Bulgaria finds itself in a process of transformation and reforms, and in this process there are very major achievements, but also of course problems and errors," she said in Brussels.

"It is a pity that the attention in the last few months is focused on bad news and problems," she added.

Since it joined the EU last year, Bulgaria has remained under strict surveillance in several sectors: its justice system, management of EU funds, food safety and aviation security.

But while progress has been seen in the latter two, the others have been the constant focus of criticism in the European Union.

In reaction, Brussels has frozen several hundred million euros since the beginning of the year in pre-accession funds, which Sofia still has a right to use even though it is now an EU member.

According to the draft report, the two agencies which supervise around 610 million euros (967 million dollars) have not been providing "sound financial management", and the Commission plans to end their contracts.

For money that has already been spent, the Commission will study whether it was spent on correct projects and "shall declare the amounts which have not been properly spent as ineligible and, as the case may be, recover them."

The publication of the report on Bulgaria's management of EU funds and a second on corruption at the same time is meant to send a strong message from the Commission, one diplomat said, on condition of anonymity.

"It's the last chance for Bulgaria," the diplomat said.

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