BRUSSELS (Reuters) - European Union finance ministers will try on Tuesday to break a deadlock on new capital rules aiming to cover banks' risks, a reform intended to prevent another financial crisis but which has exposed deep rifts between Britain and the rest of the EU.
Britain refused to back a draft EU law earlier this month, when Chancellor of the Exchequer George Osborne accused fellow finance ministers from the bloc of trying to water down the rules to a point where they would make him "look like an idiot".
Osborne is alone among the 27 EU ministers in calling for further changes to a law that introduces rules written by international regulators for the European Union's 8,300 banks next year.
Seeking to block a deal supported by the rest of the European Union could result in an embarrassing defeat, making a compromise more likely.
"Britain is now left standing alone," said one EU diplomat.
Margrethe Vestager, the economy minister of Denmark - which as holder of the rotating EU presidency plays a central role in negotiating deals - said she believed an accord was in reach.
"We hope to get a deal," she said. "(Going back to) the drawing board is not an attractive option."
Osborne wants to defend Britain's autonomy in controlling financial services, which account for 9 percent of its economy, almost as much as manufacturing.
Having bank-rolled the 46-billion-pound rescue of Royal Bank of Scotland, the world's biggest bailout during the financial crisis, Britain has fought for the freedom to set higher capital standards than the EU norm.
Osborne has argued that Britain - not the EU's executive Commission - should decide how to ensure its banks are safe, as it would bear the financial consequences of a bailout.
Under a possible compromise, Britain would be able to raise a bank's minimum capital from the 7 percent core tier 1 capital ratio - set by the so-called Basel III code - to 12 percent. Above this, it would need approval from the European Commission.
But such a deal could increase tensions in Britain's ruling Conservative party. Many of its supporters want Osborne to stand firm against EU controls and would see a compromise as giving in to Brussels.
Anticipating such criticism, British government officials said last week that the deal would not hamper its freedom to reform banking.
(Reporting by John O'Donnell; editing by Rex Merrifield)