The rules, which came into force yesterday, apply to all scheduled and charter flights. They set compensation for overbooking at between €250 (£173) and €600 (£414), depending on the length of the flight.
Companies will now also have to provide free meals, refreshments, free phone calls and hotel accommodation if the delay continues overnight.
Airlines failing to comply will face fines of up to £5,000 a passenger, with the Civil Aviation Authority responsible for sorting out any complaints affecting UK carriers.
Low-cost operators have agreed to abide by the regulations, but say they are being unfairly targeted. Europe's biggest budget airlines, easyJet and Ryanair, say they never overbook, and that the new rules could mean they are forced to pay up to six times the value of a discount airfare.
EasyJet said compensation should be proportionate to the fare paid.
Its chief executive, Ray Webster, said: "What started as a good piece of legislation to prevent traditional airlines bumping off passengers through overbooking has become a bad piece of legislation and will cause unnecessary confusion and conflict between airlines and their customers."
Jan Skeels, the secretary-general of the European Low-Fares Airlines Association (ELAA), which is mounting a legal challenge to the regulations, said airlines would be forced into a fundamental rethink of their operations.
"Passengers will realise after a while that a route they fly on quite often is no longer viable," he said.
The ELAA and the International Air Transport Association have challenged the new regulations and expect a ruling from the European court of justice in September or October.
British Airways has also questioned the need for the regulations. A spokeswoman said last night: "We already offer generous compensation and provide care and assistance for passengers so the level of compensation seems to have risen disproportionately."
But she said that BA would not put up its prices and had no plans for legal action.
James Fremantle, an adviser at the Air Transport Users Council, dismissed suggestions that the rules would lead airlines to raise their fares.
"Airlines have said that this will push up prices but we don't believe this," he said. "There is too much competition out there.
"We are not concerned that passengers will lose out. They will only benefit by getting compensation and benefits when they are inconvenienced."
Airlines have attacked new EU legislation which will force them to pay greater compensation to customers in the event of overbooking, cancellations and delays.

Consumer groups have praised the new rules, which set the level of compensation between €250 and €600 depending on the circumstances and the length of the flight. "This is some comeback for passengers who have been inconvenienced," James Fremantle, industry affairs adviser for the Air Transport Users Council, told Reuters. Before this legislation came into effect, passengers "bumped" from a flight could claim between €150 and €300.

The new rules apply to all scheduled and chartered flights. Previously only scheduled flight operators were obliged to offer compensation in cases of overbooking— they did not have to extend compensation to travellers affected by flight cancellations. Low cost airlines have criticised the new compensation levels arguing that the compensation paid will exceed the price of the ticket.

The effort by the EU is to discourage airlines from deliberately overbooking flights, a practice which has become routine for most major airlines. Overbooking often leads to "bumping", where passengers who cannot be guaranteed a seat are moved to a later flight. In future when this happens airlines will have to offer compensation. Additionally, if flights are cancelled or delayed by more than two hours all passengers must be compensated. This will be the case except in "extraordinary circumstances", the definition of which may or may not include bad weather, security alerts or strikes.

"It's a preposterous piece of legislation, we among all airlines are fighting this," Ryanair deputy chief executive, Michael Cawley told BBC radio 4's Today programme. It has also been claimed that the advice may mislead customers by having them believe that they may be entitled to compensation if flights are delayed due to bad weather.

Marja Quillinan-Meiland, European Commission spokeswoman has said that there are "grey areas" but added "these are not as big as the airlines are making out." Disputed cases would be heard by national enforcement bodies which would decide if there is a case to answer. 

European Regions Airline Association (ERAA) director of air transport Andy Clarke said "we reckon it's going to cost European air passengers – not the airlines, the airlines have no money, it has to be paid by the passengers – 1.5bn euros, that's over £1bn a year loaded onto European passengers. That's basically a transfer of money from passengers whose journeys are not disrupted to passengers whose journeys are disrupted."

These extra costs may also lead to carriers cancelling routes to areas that have been identified as problem destinations. 

The European Low-Fares Association (ELFA) is mounting a legal challenge to the laws. ELFA and International Air Transport Association expect a ruling from the European Court of Justice in fall of 2005, until then airlines have said they will comply with the regulations.