* Bucharest stocks retreat from 2-month low on budget worry * Romanian president says he will challenge budget in court * Magyar Telekom, MOL cash-flow outlook disappoint (Recasts with retreat of Romanian shares) By Sandor Peto and Radu-Sorin Marinas BUDAPEST/BUCHAREST, Feb 22 (Reuters) - Romanian shares reversed an early rise to two-month highs on Friday after the country's President Klaus Iohannis said he would challenge the government's 2019 budget plan in the Constitutional Court.
Bucharest shares fell more than 20 percent in a few weeks after new taxes on banks and energy firms in the 2019 budget were announced in December.
Since hitting its lowest level in more than two years in January, the main index gradually regained some ground, but the worries flared up on Friday after Iohannis said he would challenge the "unrealistic" budget.
The index fell 1.2 percent by 1231 GMT, while Warsaw and Prague tracked a rise in shares in Asia and in Western Europe on optimism over U.S.-China trade talks.
Banks led the decline in Bucharest.
Banca Transilvania shed 1.9 percent, retreating from a 6-week high, and BRD Groupe Societe Generale fell 2.6 percent, off a 2-month high.
"There is some nervousness among investors about the fate of this year's budget and its final shape, nobody really knows what will change in it or if something will change in it," one Bucharest-based stock broker said.
"This is uncertainty and bank stocks are normally hit harder." Budapest's main index also bucked the rise in Europe, dropping by 0.2 percent.
Magyar Telekom shares shed 1.2 percent, extending a decline since reporting fourth-quarter earnings on Wednesday.
Oil group MOL struggled to break through resistance levels at 3,300 forints ($11.78) despite a surprise rise in its fourth-quarter earnings.
Equilor brokerage analyst Zsolt Bosnyak said an expected decline in both MOL and Magyar Telekom's free cash flow may be behind the relatively weak performance of the shares.
"There may be some disappointment over MOL's EBITDA guidance, while downstream investments will cut their free cash flow," he said.
Magyar Telekom forecasts 5 percent annual growth in its free cash flow, but investment in 5G technology may cut into its cash and it will face growing competition, Bosnyak said.
OTP Bank struggled to push through three-week highs. It may get a boost when it reports earnings next week, Equilor analyst Lajos Torok said.
The Czech crown and the forint eased about 0.1 percent versus the euro, while the zloty and the leu were a shade firmer.
The dinar rose to 118.11 against the euro, after Serbia's annual inflation rose to 2.1 percent in January from 2 percent in December.
The kuna slipped to 7.425. Croatia's inflation fell to an annual 0.2 percent from 0.8 percent in January.
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