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London and Paris head for showdown on hedge funds

BRUSSELS (Reuters) - London and Paris face a showdown over new rules for hedge funds within weeks of British elections, with both sides refusing to budge on a controversial law to control the secretive industry, diplomats said.

Spanish Economy Minister Elena Salgado is preparing to ask European finance ministers at a gathering next month to give the green light to new curbs on hedge funds and private equity, one diplomat said.

“Work is continuing in order to have it in May,” said the diplomat, who is close to Spain, which holds the European Union presidency and will chair the meeting. “Ambassadors will have to decide this next week.”

Such a move is set to escalate a long-running Anglo-French spat over the treatment of foreign funds under the new regime. It will also fuel tensions between Brussels and Washington, which fears the rules will stop U.S. funds operating in Europe.

Privately, Paris has threatened to use EU voting rules to push through the law over the objections of Britain.

With London largely isolated, it would be easy for France to win the backing of a majority of European countries.

But this would break with a Brussels diplomatic code by which large countries such as Britain -- home to eight out of 10 European hedge funds -- are not bullied into acceptance.

Last week, Michel Barnier, the French commissioner in charge of overhauling financial services across the 27-country EU, intervened again to head off a full-blown row between the two sides.

But at a meeting last week in Madrid, French Economy Minister Christine Lagarde told Barnier that France was standing firm and would not concede to British demands that foreign funds be entitled to a license to operate across all EU countries.

GREEK TRAGEDY

The draft law had been intended to curb pay and borrowing at hedge funds and usher in an era of transparency for a secretive industry that many politicians have said exacerbated borrowing difficulties in Greece by betting on its debt.

But Britain wants lighter regulation of an industry important for London’s financial center, while Germany and France are seeking a heavier clampdown.

Negotiations in the European Parliament, which must also approve the law, have been protracted.

Some British parliamentarians are hoping to derail a regime that would require hedge funds and private equity groups to register and disclose closely guarded trading information -- the traditional advantage of hedge funds in the open market.

U.S. Treasury Secretary Timothy Geithner has complained that the controls could discriminate against American firms.

Washington, mulling lighter regulation for the sector, is worried the new EU rules would make it harder for a New York hedge fund, for example, to find investors in Europe.

Barnier has signaled willingness to license foreign funds with a base in London, for example, to do business across the continent. Diplomats, though, say the former foreign minister lacks the backing of French President Nicolas Sarkozy on this.

The tug-of-war between Brussels and Washington will also hold up leaders of the Group of 20 developed and emerging economies who are trying to keep momentum in a regulatory crackdown on banking.

Editing by Dale Hudson

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