The European Union proposed watering down rules that would have effectively banned the sale of new combustion-engine cars in the bloc from 2035, after heavy pressure from the automotive industry.

The move announced Tuesday is the latest sign of a major economy pulling back on its electric-vehicle ambitions as the transition away from gasoline-powered cars proves more difficult than many policymakers had anticipated. It comes as the EU seeks to improve its competitiveness and trim some of the rules that businesses say are holding them back.

Instead of requiring automakers to completely eliminate carbon-dioxide tailpipe emissions for new cars starting in 2035, the EU’s new proposal calls for a 90 percent reduction from baseline levels. The remaining 10 percent would need to be made up through the use of low-carbon steel or from e-fuels and biofuels, according to the proposal.

The European Commission, the EU’s executive arm, said its plan maintains a strong market signal in favor of zero-emission vehicles while giving carmakers more flexibility. The change would mean plug-in hybrid electric vehicles, range extenders and internal combustion engines can still be sold in the EU after 2035, in addition to fully electric and hydrogen vehicles, it said.

The proposal will need approval from the EU’s member states and the European Parliament before it can become law.

Industry groups said the proposal was a positive first step but raised questions about the details. The measures “are too complex” and won’t be enough to protect production and jobs, the European Association of Automotive Suppliers said.

Carmakers had argued that the original 2035 target for zero emissions was unachievable because of a slower-than-expected uptake of EVs among consumers.

“Clearly the current EU and U.K. requirement for CO2 is out of sync with the market reality,” Ford Motor Chief Executive Officer Jim Farley told reporters last week, when the U.S. automaker said it would outsource production of two small EVs to its French peer Renault. “Something has to change.”

In a sign of how the bumpy transition is hurting automakers more broadly, Ford said Monday that it expected to take about $19.5 billion in charges, mainly tied to its electric-vehicle business.

In Europe, automakers have had to price their EVs aggressively to hit regulatory targets this year, resulting in a surge in sales but weaker profits.

Volkswagen, for example, reported a loss for the third quarter. The region’s largest carmaker said it sold more lower-margin EVs while its Porsche brand was hit by write-downs related to EV investments that hadn’t yielded the expected returns.

Europe’s vast complex of automotive suppliers is being particularly hard hit by the transition. EVs contain fewer of the mechanical parts the companies specialize in and more electronics, where Asian supply chains are dominant.

Bosch and ZF Friedrichshafen—two of Europe’s largest automotive suppliers—announced thousands of job cuts in recent months. A study by consulting company Roland Berger for the European Association of Automotive Suppliers found that as many as 350,000 jobs could be lost by 2030 if the current trend continues.

Write to Kim Mackrael at kim.mackrael@wsj.com and Stephen Wilmot at stephen.wilmot@wsj.com