A controversial European Union draft law that would subject hedge funds and private-equity firms to tighter regulation cleared an important hurdle late Monday, winning committee-level approval from the European Parliament.

Members of the economic and financial affairs committee, meeting in Strasbourg, France, backed the proposal by a vote of 33-11, with three abstentions.

The bill, drafted by French conservative Jean-Paul Gauzes, is firmly opposed by Britain, which is keen to preserve the City of London's position as host to more than 80 per cent of the European hedge fund industry.

Gauzes defended the proposals as providing "greater transparency and better protection of investors, while at the same time supporting the financial industry as long as it works in favour of the real economy."

Hedge funds have been accused of exacerbating the Greek debt crisis by betting on its default, while private-equity firms were accused by left-wing politicians in Germany of acting like "locusts," by stripping the assets of the firms they bought.

EU finance ministers were set to vote Tuesday on an even stricter version of the directive which, despite British opposition and criticism from the United States, was expected to be approved by a qualified majority.

Most EU member states want to limit the so-called passport, which would would allow hedge-fund managers to operate across the EU on the basis of a single registration in one of its member states, to firms formally registered in the bloc.

Hedge funds operating in the EU but legally registered in third countries, such as the United States or offshore centres such as the Cayman Islands, would instead have to seek individual licences in each of the countries they operate in.

The EU Parliament's committee backed a more liberal approach, which would allow non-EU hedge funds and private-equity firms to obtain the passport as long as they conform to the EU's transparency standards.

A common approach between the EU's two legislative bodies will have to be found before the new rules can come into force.

The EU's internal market commissioner, Michel Barnier, said Monday that he would strive to broker a compromise before Parliament's plenary casts its final vote on the bill in July.