European Union finance chiefs failed on Tuesday to resolve a row over new rules to control hedge funds, a spokeswoman for the EU's Spanish presidency said.

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 blamed for exacerbating fiscal problems in Greece through betting on its debt.

But finance ministers were unable at talks in Brussels to resolve a dispute between Britain -- which like the United States wants lighter regulation of an industry important for London's financial centre -- and Germany and France, which want a harsher clampdown.

Spanish Finance Minister Elena Salgado said to ministers that much progress had been reached but that more work needed to be done to reach maximum support, said a spokesman for Spain, which chaired the negotiations.

Although many experts believe the previously unregulated industry now needs strict controls following the financial crisis, London fears the rules could force out foreign hedge funds. The law will also have an impact on private equity.

Diplomats and ministers will gather again for negotiations in the coming months on a stalemate which is a time-consuming distraction for the EU's planned shake-up of financial services.

The overhaul is led by the EU's financial markets chief, Frenchman Michel Barnier, and includes measures ranging from a squeeze on bankers' pay to demanding higher reserves of capital for unexpected losses.

Relations between London and Paris are already strained over new regulations such as the setting up of super-watchdogs that would have power to overrule local supervisors.

But the proposed hedge funds rules have also led to disagreement between Brussels and Washington.

U.S. Treasury Secretary Timothy Geithner has written to Barnier to complain that the proposed EU controls on hedge funds could discriminate against U.S. firms.

The two sides also disagree over how to deal with large banks that pose a risk to the wider economy.

U.S. President Barack Obama wants to ban banks from trading on their own account as well as demanding they ditch stakes in hedge funds and private equity. Europe is more lenient.

The tug-of-war will put pressure on leaders of the Group of 20 major economies who are trying to maintain momentum in a regulatory crackdown on banking.

(Additional reporting by Jan Strupczewski and Julien Toyer, editing by Mike Peacock)