UPDATE 1-EU Commission says watching OMV-MOL battle

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BRUSSELS, Sept 26 (Reuters) - The European Commission said on Wednesday it was following closely the attempts by Austrian oil and gas group OMV (OMVV.VI) to buy power firm MOL MOLB.BU in Hungary, which the Hungarian government could block.

Hungary has drafted legislation to make the acquisition of companies with strategic importance more difficult, while the Commission is trying to bring down barriers to investment across the 27-nation European Union.

"The Commission is monitoring the situation very closely, in view of potential conflicts with the free movement of capital for example," said Oliver Drewes, a spokesman for European Internal Market Commissioner Charlie McCreevy.

OMV told MOL shareholders on Tuesday it would offer $20 billion for the company if MOL's board agreed to negotiate. But MOL said it would not talk to OMV as the intended bid undervalued its business.

OMV, which now owns 20 percent of MOL, launched in June its bid to create central Europe's biggest energy group.