Tim Geithner, US Treasury secretary, has warned the European Commission that its plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups, media reports said.

A letter sent by Mr Geithner this month to Michel Barnier, Europe’s internal market commissioner, shows that the European Union is heading for a clash with the US if it pushes ahead with what the US - and UK - fear could be a protectionist law.

Industry groups in the alternative investment industry, for example, have warned that EU regulation, instead of protecting investors, will merely drive hedge funds outside the EU, costing thousands of jobs.

Hedge funds have been attacked since the financial crisis erupted over two years ago for aggravating market turmoil, but managers of these investment vehicles point out that while they suffered their worst-ever year for performance in 2008, losses were far less severe than for long-only funds tracking major stock indices.

European officials are trying to thrash out a compromise deal on the sweeping overhaul that has angered the industry and worried institutional investors.

If European diplomats reach agreement at a meeting today, the directive will be put to EU finance ministers when they convene on Tuesday next week, a report by the Financial Times said. The proposed rules will require approval by EU lawmakers.