New Delhi, Dec. 3 -- Bulgaria's government said Tuesday it is withdrawing a controversial budget proposal after an evening demonstration drew tens of thousands of peaceful participants that was later marred by clashes between a much smaller group of masked men and police.

Opposition and business groups have warned that plans for higher taxes, increased social security contributions and spending increases could hurt investment and expand the shadow economy as the country prepares to join the eurozone at the start of next year.

The center-right government of Prime Minister Rosen Zhelyazkov first promised to withdraw the draft for thorough revision after protests last week, but later backtracked, sparking protests in the capital, Sofia, an...