German Chancellor Angela Merkel had led calls for a cut to the funds, which are linked to Turkey's stalled bid to join the bloc, following mass-scale arrests in the country since the failed July 2016 coup.
MEPs and member states have agreed to reduce the "pre-ascension funds" by 105 million euros ($124 million) and froze an additional 70 million euros of previously announced spending.
In a statement, lawmakers said "they consider the deteriorating situation in relation to democracy, rule of law and human rights worrying".
Turkey has dismissed more than 140,000 officials since the coup attempt, and arrested another 50,000, including opposition politicians, academics, journalists, activists and EU citizens.
The German government has warned its citizens against travelling to Turkey as they risk "arbitrary" arrest.
"We have sent a clear message that the money that the EU provides cannot come without strings attached," said Romanian MEP Siegfried Muresan, the lead rapporteur for the budget.
Europe had pledged 4.45 billion euros in pre-accession spending for Turkey from 2014 to 2020, but only 360 million euros has been allocated so far.
Ankara's application to join the EU is effectively frozen, as several European leaders have criticised the hardline response to the thwarted bid to overthrow President Recep Tayyip Erdogan last year.
Overall, the 2018 budget calls for 160 billion euros of committed spending for ongoing programmes and 145 billion in payments expected for the year, increases of 1.3 percent and 7.8 percent from 2017.
The agreement still needs to be formally adopted by the EU Council, representing member states, and the European Parliament.
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