France is ready to drop objections to a key part of a law to tighten rules on hedge funds in exchange for concessions from London, Reuters quoted a senior diplomat as saying. The compromise could end a row that threatened to harm relations with the US.

As talks entered their final round, France demanded that the UK surrender more policing power to a European watchdog allowing it to monitor foreign funds. Paris, in return, would agree to let such funds qualify for a licence to work across the bloc's 27 countries.

"There are real signs of both sides coming closer together," said the EU diplomat, who is familiar with France's thinking, commenting on a deal which would likely postpone the introduction of the EU-licence scheme.

At the centre of the debate has been argument on whether proposed EU rules will block non-EU funds from being marketed to EU investors. Industry figures have warned that such regulations will drive hedge funds and other alternative investment vehicles from London to places such as Singapore and Switzerland.