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I booked a hotel a yesterday though Booking.com for a special occasion in Barcelona (I'm traveling from another European country). The booking isn't for another few months.

The booking includes:

• Free Cancellation




• Pay at the hotel




• Confirm booking with Credit Card

The hotel confirmed the booking this morning but a few hours later submitted this message though the booking.com website to raise the rate by around €40/night (If I try to book it again from Booking.com the price is around 265€/night and they are now offering the hotel at 165€/night)

Message:

Dear XXXXXXX, 

We contact you in reference to your reservation, made
in the last few hours, at the Hotel XXXXXXXXX. 
Unfortunately we have
to inform you that there has been a serious human error and therefore
the rate of your reservation does not match to this hotel category.
Due to this situation, we would like to offer you the possibility to
cancel your reservation, obviously without any cost, or to reconfirm
your reservation at the special rate of EUR 165 per night / room VAT
included.  We appreciate your understanding and cooperation in these
circumstances and we ask you to accept our sincere apologies, hoping
not to cause any inconvenience.  We are waiting for you to indicate
which of the two alternatives offered is of your greatest
convenience. 

Sincerely, 

XXXXXXXXXXX

Do I need to accept their new terms of the booking, accepting their new price/cancel or am I entitled to keep the original price?

I wouldn't want to arrive there with a sour taste in my mouth, or for them to cancel the booking last minute with no recourse, while I had originally budgeted €140/night, we want the trip to be special with no issues.

Can a hotel cancel a confirmed reservation?

Yes. The best you can do is report to booking.com and hope they get them to honor the original amount. This behavior is unfair however hotels and airlines sometimes post wrong fares. When they discover it, the decent ones honor the wrong fares.

Cathay Pacific error sees $16,000 flights sold for $675

Thanks to a glitch, $16,000 first-class seats sold for $675. Errors
like these are more common than you’d think.

The airline quickly addressed the problem but agreed to honor the
heavily discounted fares.

However many times the organizations that don’t care about customer service refuse to honor the fare.

You don’t have much recourse because you’re not going to file a lawsuit about it, neither can you force them to give you a room when you arrive there.

The booking.com terms and conditions state, in part:

Obvious errors and mistakes (including misprints) are not binding.

All special offers and promotions are marked as such. If they are not labeled as such, you cannot derive any rights in the event of obvious errors or mistakes.

You didn't say what the price was that you paid or whether it was marked as a special offer or promotion, so it's impossible for us to say whether this alleged pricing error was "obvious" or not. But you should still consider contacting booking.com anyway. In no event should you contact the hotel before exhausting your options with booking.com.