AFP - Europe is moving towards tighter regulation of hedge funds -- blamed for exacerbating a global financial crisis -- with pay curbs to the fore.

The European Parliament and member states are coming up with their own responses to a European Commission proposal from April said by critics to be too timid.

In a report presented on Thursday by French MEP Jean-Paul Gauzes, the European Union is urged to regulate so that traders' income is controlled in a similar way to bankers' bonuses.

That stance comes despite the angry refrain from hedge and other fund managers that their businesses need higher incentives -- and that if they are curbed, funds will simply move to another territory.

Gauzes said the basis for pay should be G20 leaders' conclusions in September setting out an "international consensus concerning remuneration of staff in banks and other systemically important financial services firms."

He said those principles should apply to alternative investment fund managers and the commission "should elaborate implementing measures to that end."

The European Central Bank last month warned that EU plans to regulate hedge funds and private equity groups could tilt the playing field against EU companies.

That followed a cry in the summer from Britain's financial services minister who accused fellow EU partners of seeking to make "political capital" from the issue.

Gauzes also wants to see an end to the speculative investment practice known as short-selling, which was banned at least temporarily by some countries including Britain in the early days of the financial crisis.

"There is a concern that, notably in extreme market conditions, short selling may contribute to market disorder," his report said.

"Therefore, short selling should operate in a harmonised regulatory framework to reduce the potential destabilising effect that it may cause."

The stance on hedge funds is echoed by the EU's current Swedish presidency, which is trying to bring about a successful conclusion to a range of financial supervisory proposals before handing over the baton to Spain at the end of December.

However, plans for supervision seem doomed to founder, at least in their existing form, on a rock of British opposition -- particularly concerning watchdogs that the commission wants be introduced, to police banks, insurers and markets.