Ebay Inc urged European regulators to drop a requirement for Internet retailers to have bricks-and-mortar shops, warning it would hurt small firms, keep prices high and stifle e-commerce.

According to a draft regulation drawn up by the European Commission and seen by Reuters, suppliers may be allowed to require that distributors have a brick-and-mortar shop before they can sell online. The proposed rules would replace existing guidelines exempting companies from strict EU competition rules under certain circumstances. Those rules expire at the end of May.

A brick-and-mortar provision would hold back e-commerce growth in Europe over the next decade just when it is at a teenage stage, Tod Cohen, eBay's vice president, told reporters. The direction of the general text is very positive toward online commerce. (But) this brick-and-mortar provision is inconsistent with this, he said, saying the requirement would benefit large retail players at the expense of small players.

Those who want to engage in price discrimination will have another tool to do it, said Cohen, who is lobbying the Commission to drop the proposed rule changes.

Brand owners - often in the high-end or luxury segment - say the provision is necessary to stop so-called free riders, competitors who benefit from promotions carried out by brand name companies, shifting stock online on the back of advertising of a brand's products and services.

Because free riders do not have to pay for the costs of a shop and related overheads, they can frequently offer brand-name products over the Internet at discounted prices.

The purpose of a brick-and-mortar shop provision is to help retailers invest in luxury shops, said Antoine Winkler, a partner at law firm Cleary Gottlieb Steen & Hamilton who represents several brand name companies.

Cohen's criticism echoed that of Amazon, the world's largest online retailer.

The brick-and-mortar rule would reduce competition and limit consumers' choice, Amazon Europe's retail vice president, Greg Greeley, wrote in the Wall Street Journal earlier this month.

(Editing by Luke Baker)