By Krisztina Than

BUDAPEST (Reuters) - Hungary's nationalist government plans to tighten control over theaters, in a move critics said could undermine their independence and stifle artistic freedom.

According to draft legislation seen by Reuters on Friday, the government would set up a National Cultural Council, headed by a minister, with the task of "setting priorities and directions to be followed in Hungarian culture".

The minister would also have a say in the appointment or sacking of theater directors at institutions that are jointly financed by the state and municipality.

"It is a fundamental requirement for activities belonging under the auspices of this law to actively defend the interests of the nation's wellbeing," the bill says.

Since Prime Minister Viktor Orban won power in 2010, his right-wing Fidesz party has rewritten Hungary's constitution, gained control of state media, and businessmen close to Orban and the party have built empires.

His government has often clashed with the European Union over what his critics say is a steady erosion of democratic checks and balances in the Central European country of 10 million people.

Orban has often challenged Western liberal taboos and after winning a 2018 election, his third in a row, flagged major changes ahead, claiming a "mandate to build a new era".

His supporters have called for an end to what they see as the dominance in Hungarian culture of leftist-liberal ideas. Orban says his election wins give him a mandate to redefine various aspects of national life.

"An era is determined by cultural trends, collective beliefs and social customs. This is now the task we are faced with: we must embed the political system in a cultural era," Orban said last year.

A government spokesman on Friday confirmed the government sought a greater say in the operation of theaters that it partly funds. He said a recent sexual harassment case at a Budapest theater made the changes necessary as the government currently has no power to sack the director of the theater involved.

Gergely Karacsony, a liberal sociologist elected mayor of Budapest in October in a rare setback for Fidesz, said on his Facebook page the bill was a step "in a very bad direction".

"This proposal would eliminate cultural diversity, which stems from freedom -- which means artists are not kept on a political leash," Karacsony said.

The Hungarian Theatre Society also issued a statement saying the plan would curtail artistic freedoms in an unacceptable way.

(Reporting by Krisztina Than; Editing by Gareth Jones)