UPDATE 2-EU states back reform of bloc's mutual funds

(Adds industry reaction)

By Huw Jones

BRUSSELS, Dec 2 (Reuters) - Britain, Germany and France on Tuesday backed an EU plan to reform how pan-European mutual funds can operate, a move that could save the industry money while giving investors a wider choice of lower-cost funds.

"The investor will have greater diversity of products and lower cost. It will ensure proper protection of investors thanks to better supervision," Christine Lagarde, finance minister for EU president France, told a meeting of the bloc's finance ministers.

The so-called undertakings for collective investment in transferable securities (UCITS) draft law updates EU rules overseeing cross-border mutual funds sold across the 27-nation bloc.

It would allow funds in the 6 trillion euro ($7.6 trillion) retail sector to merge and pool resources more easily and list quickly. The reform faced opposition from Luxembourg and Ireland after the inclusion of a so-called management company passport.

A passport would allow a fund in one country to manage funds it has dotted across Europe without having to open offices in each of those countries.

Ireland and Luxembourg are major centres for listing funds and home to companies that provide back office services.

The two countries said managing those funds from elsewhere would fragment supervision but others argued the two simply fear losing business to London, Frankfurt and Paris where many large, cross-border funds have their base.

"Luxembourg did support the Commission's initial proposal but now we have the management company passport we have to keep our reservation," Luxembourg's Economy Minister, Jeannot Krecke, told the meeting.

Parliament's economic and monetary affairs committee voted overwhelmingly in favour of adopting the reform with a management company passport.

Three-way talks between parliament, EU states and the Commission will start soon on a final deal.

"We have a very good basis now for a formal trilogue meeting that will start tomorrow," said German Liberal Wolf Klinz, who is steering the reform through parliament.

"I am quite optimistic we shall be able to reach a consensus with the Commission and council before Christmas so that we can then go to prepare the vote in plenary in late January or February," Klinz told Reuters.

Luxembourg centre-right lawmaker, Astrid Lulling, said in a debate ahead of the vote she disagreed with unfettered centralised management of funds that will allow them not to have a physical presence in the countries they are listed.

"The system as set out will not work without some difficulties. The division of powers between supervisors will give rise to a lot of discussion," Lulling said.