European Union finance officials at impasse on global reform

European finance ministers failed to reach agreement Tuesday on strict new regulatory reforms that would have imposed fresh restrictions on American hedge funds doing business in Europe.

The ministers were set to vote at a meeting in Brussels on new rules for hedge funds and other private equity firms, but they yanked the measure off their agenda after it became clear that the British in particular remained steadfastly opposed. On Monday night, British Prime Minister Gordon Brown personally intervened, voicing his opposition in a phone call to his Spanish counterpart, José Luis Rodríguez Zapatero — whose government currently holds the European Union’s rotating presidency. U.S. Treasury Secretary Timothy F. Geithner has also expressed dismay at the European proposal, calling it protectionist.

Spanish officials said they would continue to seek a compromise, with an eye to bringing the measures back before the E.U.’s 27 finance ministers by June.

The measure’s failure set in motion another round of debate on both sides of the Atlantic over the drafting of new regulations in the wake of the global financial crisis.

“We want to reach agreement on the directive, but more detailed work is needed in the E.U. and G-20 to make sure we have a shared global approach,” Alistair Darling, Britain’s chancellor of the exchequer (the equivalent of Treasury secretary) said Tuesday, referring to the Group of 20.

The European proposal would force hedge funds to comply with governance standards and set new rules on liquidity and conflicts of interest. Non-European funds could be barred from Europe if the standards in their home countries were not similarly strict.

The French, in particular, were strong backers of the reforms, arguing for additional controls and greater openness in the largely unregulated world of hedge funds, where a lack of transparency has been cited as having contributed to the financial crisis. They are also pressing for new restrictions on funds based outside Europe, citing the experience of Europeans who lost fortunes in the Ponzi scheme engineered by Bernard L. Madoff.

The British, however, viewed the proposed restrictions as a direct assault on the financial industry in London, Europe’s financial capital and a vital source of tax revenue and jobs in Britain. Roughly 80 percent of European hedge funds operate out of London, but a large portion maintain their headquarters in the Cayman Islands and other offshore jurisdictions. That means that under the proposed rules, they would have faced the same restrictions as U.S. firms.

The conflict underscored the difficulty of coming up with new regulations, leaving the Europeans struggling to find a compromise that would be palatable to the British and in harmony with the Americans, but that also suits the French and German desire for tough measures. Any proposal agreed on by the E.U. finance ministers would require approval by the European Parliament.

“There are still significant concerns . . . both within the E.U. and internationally, and we hope that European policymakers will in the coming weeks and months reach a sensible consensus agreement to allay those concerns,” said Andrew Baker, chief executive of the Alternative Investment Management Association, a London-based trade group that represents hedge funds.