The EU executive European Commission early this month proposed new sanctions but Hungary's opposition has so far barred the unanimity of all the 27 member countries needed to approve them.
"Solutions first, sanctions afterwards," Hungary's Justice Minister Judit Varga said ahead of talks in Brussels on Monday about what would be the sixth package of EU sanctions on Russia since it invaded Ukraine on Feb.24.
That clashed with calls from several governments for a deal before a summit of national EU leaders on May 30.
"It is...important that we decide on the sixth sanctions package in a timely manner, that we impose an embargo on Russia," Germany's Anna Luhrmann said ahead of the ministerial meeting that would also look at financial aid to Ukraine, including for reconstruction after the war ends.
Croatia backed that, saying it was ready to upscale its LNG terminal on the island of Krk to help EU's efforts to wean itself off Russian energy supplies.
France, Lithuania, Belgium and Ireland have urged a compromise before the summit during closed-door discussions among EU diplomats last week, sources said.
The sources added Sweden suggested dropping the oil embargo to move ahead with other new sanctions if that was necessary. They would include the exclusion of Sberbank and other Russian lenders from the SWIFT banking system and blacklisting more individuals held responsible for the war.
While the bloc struggles to agree on the new package, countries have decided to add more names to the list of sanctioned individuals, in addition to those proposed earlier in May, diplomats said.
Hungary, which is heavily dependent on Russian oil, has said it would need about 750 million euros ($800 million) in short-term investments to upgrade refineries and expand a pipeline bringing oil from Croatia.
It also said the longer-term conversion of its economy away from Russian oil could cost as much as 18 billion euros.
The Commission last week offered up to 2 billion euros in support to countries that are land-locked and reliant on Russian supply - Hungary, the Czech Republic and Slovakia. They have also been offered a longer transition period.
The Commission also proposed a 210 billion euro plan meant to end Europe's reliance on Russian fossil fuels by 2027, but has not indicated how this money would be shared among EU states.
One of the key stumbling blocks remains the amount the EU is ready to pay to Hungary to adapt two refineries that at the moment can only process Russian crude, an official told Reuters on Monday. ($1 = 0.9366 euros)
In a signal of criticism against countries seeking derogation, Poland sought a ban on their resale of refined oil products, such as diesel made from Russian oil, sources also told Reuters. That would be in addition to resale ban on crude oil which is already envisaged in the draft sanctions.
(Additional reporting by Kate Abnett, Bart Biesemans; Editing by Jan Harvey and Angus MacSwan)
By Gabriela Baczynska and Francesco Guarascio