European finance ministers meeting Tuesday in Brussels opted to delay plans to discuss hedge fund and private-equity regulation that would have risked a trade war by limiting access to the European Union.

Transatlantic tensions grew last week when the EU's financial services commissioner, Michel Barnier, vowed to defend the proposals after they were criticized by U.S. Treasury Secretary Tim Geithner. He said in a letter to Barnier that the new rules may discriminate against U.S. funds. The plan would force funds based outside the EU to accept the rules if they attract investors from the 27-nation bloc.

EU officials meeting Tuesday removed the fund proposals from an agenda to be discussed by finance ministers. The aim remains to reach agreement during the first half of the year, an EU official said.

"Common sense is prevailing," Stephen Burke, a director at the hedge fund adviser IMS Consulting Group Ltd. in London, said. "We've been rushing to the edge of a precipice, and now they're holding back. It's going to give us a bit more time to get the right outcome."

Nearly two-thirds of institutional investors polled by the European Private Equity and Venture Capital Association in Brussels said they would "substantially" reduce their holdings in European venture capital if the proposals go through, according to a survey of investors with 560 billion euros ($766 billion) under management.

"The big danger is that the protectionist aspect of the directive could spark a trade war," said Andrew Shrimpton, former head of hedge fund regulation at the U.K.'s Financial Services Authority who now advises hedge funds at Kinetic Partners LLP in London, an industry consultant. "It's going backward."

Europe's Alternative Investment Fund Management Directive, proposed a year ago, calls for limits on hedge fund borrowing, requires registration of funds with more than 100 million euros under management and imposes compensation restrictions.

One clause would mean European investors could only invest with managers domiciled in Europe, excluding funds based outside of Europe. Dutch pension plans have complained that it would limit their access to fund managers.

"The fund-raising provision, also called the 'third-country' provision, is the hot potato and is still disputed," said Richard Wilson, partner at Apax Partners LLP in London, and the chairman of the European private equity association. "We would not want the third-country provision to be approved because the net result will be less capital raised for European companies and less choice for European investors."

Barnier said Monday "there's still a way to go" before a final agreement on the directive.

"What's important is that the council has a mandate to work and put forward a compromise as soon as possible — that is to say, before June, July, with the European Parliament," Barnier said, referring to the EU's Council of Ministers, which is scheduled to discuss a possible agreement. Barnier was speaking to reporters after a meeting with Gary Gensler, the chairman of the Commodity Futures Trading Commission, in Brussels Monday. U.K. Prime Minister Gordon Brown and French President Nicolas Sarkozy discussed the EU directive last week and said they had narrowed their differences.

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