* Error took place during euro zone debt crisis
* ESMA says error due to failure to apply EU rules
* S&P says ESMA found no intent or negligence (Recasts with more detail, background, S&P reaction)
By Huw Jones and Chris Vellacott
LONDON, June 3 Europe's markets watchdog censured credit ratings agency Standard & Poor's on Tuesday for incorrectly announcing a cut in France's debt, which compounded investor fears during the euro zone debt crisis.
The error in November 2011 gave European Union lawmakers ammunition to pass three sets of laws to crack down on ratings agencies in the 28-country bloc, where they face some of the toughest rules in the world.
The European Securities and Markets Authority (ESMA) said that the incident, involving an email sent out to subscribers stating, "France (Republic of) (Unsolicited Ratings): DOWNGRADE", when S&P's rating of France had not been downgraded, breached regulations.
The move, which amounted to an embarrassing public dressing down rather than financial penalties, marks the first enforcement action by the watchdog against a ratings agency after it took over responsibility for regulating the sector in the European Union in July 2011.
S&P is one of the world's "Big Three" ratings agencies - the other two are Moody's and Fitch - who dominate the ratings globally.
S&P spokesman Martin Winn said the agency welcomed ESMA's findings that there was no intent or negligence on S&P's part in the incident.
"We publicly acknowledged the error at the time, which was unrelated to our ratings or ratings analysis. We have since enhanced our systems to safeguard against such an incident in the future," Winn said.
S&P had already angered EU policymakers who said its downgrade of Greek sovereign debt to junk status in April 2010 made it harder to put together a rescue package for the country.
The French false downgrade was sent to subscribers of S&P's web-based Global Credit Portal, used by the agency to disseminate its financial data products including credit ratings.
The mistake was the result of the rating agency's failure to meet internal control requirements set out in the EU's credit rating agency regulation, ESMA said.
"ESMA found that this incident was the result of a failure by S&P to meet certain organisational requirements set out in the CRA Regulation, relating to sound internal control mechanisms, effective control and safeguard arrangements for information processing systems and decision-making procedures and organisational structures," ESMA said in a statement.
S&P was criticised at the time for taking nearly two hours to correct its mistake, by when the market had closed.
The clarification sent the euro higher against the dollar as investors were relieved that a major euro zone country had not been downgraded.
ESMA said the investigation took time as it was the first ever by the watchdog, a process that requires the case to be heard by an independent investigating officer, with a right of reply for S&P.
The watchdog has set aside a budget of 5 million euros and 25 staff to supervise the 20 or so rating agencies it has authorised to operate in the EU, most of them small.
ESMA has a total budget of 33 million euros this year with staffing set to reach 184 people in its Paris office. There is another enforcement case relating to a ratings agency with the independent investigation officer, it added. (Editing by Jeremy Gaunt)