About 1,000 demonstrators blocked a bridge in central Budapest on Tuesday as parliament debated a motion by Prime Minister Viktor Orban's government that would increase the tax rate for hundreds of thousands of small firms.

The demonstrators initially gathered at a main square outside parliament before marching to a nearby bridge over the River Danube, blocking traffic in both directions between the two sides of Budapest amid a heavy police presence.

Nationalist Orban is facing his toughest challenge yet since taking power in a 2010 landslide, with inflation at its highest in two decades, the forint plumbing record lows and European Union funds in limbo amid a row over democratic standards.

With the bridge blocked for about an hour, choking off on one of Budapest's main traffic arteries, protesters chanting "withdraw it" faced down policemen ordering them to leave in the first major show of disquiet since Orban was re-elected in April.

"It is possible that it will not be worth continuing it (with the higher tax rate)," said 52-year-old Katalin Karolyi, who has a small business advising a company on dietary issues.

"This will endanger my livelihood, the livelihood of my entire family."

Orban's government submitted the amendments to parliament on Monday, drastically tightening eligibility for the simplified tax regime, which many small businesses opted into due to the low administration and low tax rate it offered.

However, the government says the system was abused by some businesses forcing workers into the scheme to curb their own costs, facilitating a form of covert employment.

The new rules are set to take effect in September, pending parliamentary approval. The tax had been due to raise 237 billion forints ($572 million) this year.

Laszlo Zara, a tax advisor, said the changes affecting an estimated 400,000 to 500,000 small businesses could squeeze their overwhelming majority out of the revised scheme, with some 50,000 people remaining eligible.

"This is clearly a tax increase, any way you try to frame it, a very large tax increase," he said.

"This will be inflationary because (small businesses) will not be able to reach their previous income levels, forcing them to raise prices, also raising inflation." ($1 = 413.66 forints) (Reporting by Anita Komuves Writing by Gergely Szakacs Editing by Catherine Evans and Angus MacSwan)