The House of Lords' European Union Committee said that the European Union's clampdown on hedge funds will have a serious impact on the EU's and especially Britain's economies.

The UK is seen as the major hub for European hedge funds. Three quarters of Europe's hedge funds are based in London and they contribute about £3.5 billion a year in tax revenues to the UK Treasury.

In a report published yesterday, Lord Woolmer of Leeds, a member of the Lords sub-committee on Economic and Financial Affairs, said, "We agree with the European Commission that alternative investment fund managers should be subject to regulation at an EU level but it is vital the commission get the details right and do not damage what is an important industry for the European economy."

The report, however, supports the introduction of EU "passports" for hedge fund managers, allowing them to operate across the 27-country bloc.

The committee, which was established by the Bank of England, said that Brussels' proposed directive to regulate alternative investment funds in its current form would make it difficult for managers to market non-EU funds in the EU and prevent EU investors from investing in non-EU funds.

The committee advised the government not to implement the suggested laws, which have received wide acceptance in the European countries.