Britain, Europe’s centre for investment funds, is set to lose a clash with France on new, tougher EU rules for the hedge fund industry that finance ministers will haggle over on Tuesday.

Paris leads most EU governments in favouring greater restrictions for alternative investment funds based outside the 27—nation bloc. A lack of transparency and speculative trading have been blamed for contributing to the financial crisis, including Greece’s debt troubles.

The new law, when completed, could block foreign funds from Europe if they don’t face tight oversight at home. This is aimed at funds based in tax havens like the Cayman Islands where supervisors might not be checking on risks they are taking on.

U.S. Treasury Secretary Timothy Geithner, wrote to EU officials last week, warning them that the draft rules could also block American funds from selling to European investors.

It is unclear if the rules would actually shut U.S. funds out of Europe.

The new law would likely require managers of large funds doing business in Europe to register with local market regulators and to regularly inform supervisors about their trades and risk exposure to prove they don’t pose a threat to the financial system.

They would have to disclose their overall trading strategy, their risk management system and explain how they value and store assets - and be obliged to hold a minimum level of capital to cover potential losses.

Britain is eager to protect its position as the centre of the European fund industry; more than 70 percent of Europe’s alternative investment funds are based there.

It says it favours more regulation for fund managers - but does not want to close the market to foreign funds. Officials say they would like all funds operating under global industry rules to access Europe.

It would also like to see funds authorized to sell in Britain or another nation winning a “passport” to sell anywhere in the EU. France and others are reluctant to allow this.

These aren’t the only sticking points. France is keen to get support from other EU nations to make depositories - middlemen between investors and funds - liable for losses.

That aims to prevent a repeat of the large losses some French investors made when they placed money with Luxembourg depositories who channelled it into a vast pyramid scheme run by U.S. financier Bernard Madoff.

“It’s obvious we need more prudential regulation,” said Swedish Finance Minister Anders Borg, as he arrived for the meeting. “There’s no place for protectionism.”

High—risk and high—profile, alternative investment funds have been a popular target of European political ire since some activist funds challenged management at prominent German companies - prompting a German socialist to brand them as “locusts.”

Hedge funds were caught up in a vast wave of financial regulation in the aftermath of the financial crisis - with the EU executive rushing out a widely criticized proposal in April 2009 to increase oversight and crack down on financial players operating without much supervision.

The European Parliament must also approve the new law - and the final shape of the new rules is far from final. If the rules are agreed as planned by July, they could be in place for EU funds by 2011 at the soonest and for funds outside the EU by 2014.