BRUSSELS France is ready to drop objections to a key part of a law to tighten rules on hedge funds in exchange for concessions from London, a senior diplomat said, moving to end a row that threatened to harm relations with Washington.
As talks entered their final round, France demanded Britain surrender more policing power to a European watchdog allowing it monitor foreign funds. Paris, in return, would agree to let such funds qualify for a licence to work across the bloc's 27 countries.
"There are real signs of both sides coming closer together," said the EU diplomat, who is familiar with France's thinking, commenting on a deal which would likely postpone the introduction of the EU-licence scheme.
The licencing issue a dispute between France, Britain and the United States about whether the regulations would block foreign funds wanting to do business in Europe.
Separately, a top European markets regulator told Reuters on Friday that Brussels and Washington were likely to hammer out a solution to the dispute.
"I believe that in any case there will be cooperation and the final solutions will be positive for both sides," said Carlos Tavares, head of the Committee of European Securities Regulators.
The latest twist in the tug-of-war between London and Paris over the future of the secretive hedge fund industry is likely to see both sides claim victory in their tussle over new controls.
Despite being one of the EU's more modest financial reforms, attempts to introduce rules for hedge funds, chiefly by putting them under the watch of a new pan-European supervisor, has taken on what one industry expert called a totemic significance.
France had opposed issuing a pan-EU licence out of concern that controls on those entering the market are unlikely to be tight enough, a position Washington feared would block U.S. funds.
In a last-ditch bid to press France to changing its mind, U.S. Treasury Secretary Timothy Geithner wrote to French Economy Minister Christine Lagarde this week warning her against curbing foreign hedge funds.
On Friday, the first signs began to emerge that pressure from Washington as well as wavering support from Germany for France on the issue had forced Paris to rethink.
France is sensitive to Geithner's criticism on the eve of its presidency of the Group of 20 countries, a leading forum of the world's economic powers grappling with the global recession and financial reform.
Should the row have dragged on into November, it would not only have indefinitely delayed the symbolically important hedge fund law but could also soured relations with the United States and hampered progress at meetings of the G20.
European diplomats and lawmakers will meet again early next week in an attempt to broker a deal in time for a planned vote in the European Parliament, giving its seal of approval on the law this month.
That would end a long-running row that put French President Nicolas Sarkozy at loggerheads with Britain, which fiercely defended an industry important for London's standing as a financial centre but whose protagonists a German politician famously dismissed as "locusts".
(Additional reporting by Daniel Flynn in Paris; editing by Rex Merrifield, John Stonestreet)