The European Commission launched Article 7 proceedings against Poland a year ago that have yet to reach the European Parliament.
The move dealt a stunning political blow to Prime Minister Orban, who had told the parliament a day earlier that a scathing report leading to the vote was an insult to Hungary's honour and people.
The Hungarian foreign minister, Péter Szijjártó, called the vote "petty revenge" against his country's tough anti-migration policies.
Sargentini said she expected to be invited by the council to present her report and wants European parliament president Antonio Tajani to help her with that.
The European Parliament is discussing whether to activate the so-called Article 7 that could lead to sanctions against Hungary.
It was the first move of its kind in the European Union against a member state, garnering two-thirds of the votes.
The move saw some members of the European People's Party bloc - of which Orban's Fidesz movement is a member - vote against their ally in Budapest.
With elections for a new parliament in May 2019, the vote reflects growing push-back among traditional parties in Europe against the rise of populists, who oppose migration and are accused of undermining the rule of law. Critics say that Hungary's electoral system is disproportionate; media freedoms and judicial independence are dwindling; asylum-seekers and refugees are mistreated and there are limits placed on non-governmental organizations. The most severe punishment under the Article 7 procedure is stripping Hungary of its voting rights in the EU.
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Hungary's Prime Minister Viktor Orban at the European Parliament in Strasbourg, eastern France, Sept.11, 2018.
"The Sargentini report was not adopted today, because only by violating voting rules was it possible to reach the necessary two-thirds majority laid out in the treaty", Szajer said, arguing that if they had included abstentions, the two-thirds majority would not have been achieved.
On Tuesday, Orban said his country was being targeted for choosing not to be "a country of migrants" as he dismissed charges of corruption.
"The order has arrived from Berlin and they will vote accordingly", Orban said, in reference to German Chancellor Angela Merkel, whose governing Christian Democratic Union is the largest party in the EPP. "Hungary has been condemned because they know that it would never accept pro-migrant policies".
The 197 votes cast against parliament's bid illustrate the substantial minority of European opinion who see Orban as a crusader for the rights of nation states and ethnic majorities against rules of civic behaviour agreed on by the EU in Brussels.
The Commission has preferred to pressure Budapest through standard legal powers, but the head of the European Union executive, Jean-Claude Juncker, also an EPP member, said he would have voted for the move if he were a lawmaker.
Orban has blamed Merkel for Europe's migration crisis, while the Hungarian leader was criticised for breaching worldwide standards and rules on migration and treating asylum seekers harshly.