The European Central Bank has turned up the heat on controversial plans by the European Union to regulate hedge funds, warning that the proposals could damage the industry, the Financial Times reported.

The opposition from the ECB, which feared a go-it-alone approach in Europe would backfire, will be seized upon by the alternative investment fund sector and may influence the rewriting of the proposals, the newspaper said.

Hedge funds have warned that business could be driven out of Europe by plans to regulate the sector on a pan-continental basis. In the UK, lobby groups have warned that London, home to many of the world’s largest hedge fund operations, will be badly hit and that firms will move to locations such as Switzerland.

The ECB said it supported "the intention to provide a harmonised regulatory and supervisory framework" for alternative investment fund managers in the EU. But it urged the Commission "to continue the dialogue with its international partners, in particular the US, to ensure a globally coherent regulatory and supervisory framework".