PARIS - The idea of a tax on financial transactions championed by France and Germany is unlikely to gain much traction at the next meeting of leaders of the world's 20 largest countries because it faces opposition both within the European Union as well as from countries such as the U.S. and Canada.

French President Nicolas Sarkozy Thursday said the EU will propose a tax on financial transactions to the G-20 when it gathers at the end of next week in Toronto, stressing that France and Germany would work together to make this a "major issue" and are even ready to implement it without the support of others.

Sarkozy didn't specify, however, what the proceeds of such a tax would be used for, but France has said in the past it favors using it to fund efforts to control climate change, foster innovation or fight poverty. Germany, on the other hand, sees such a tax as a way to curb speculation.

"It's primarily a tax that brings money... It could be used to tackle all the challenges we face in terms of development and climate change as well as for anything else... It's not impossible that the G-20 agrees to carry out extra work on the issue next week," a senior French official told Dow Jones Newswires.

A financial transaction tax could be levied on currency or derivatives trades, for instance. The idea would be to apply a very low rate of tax on a very wide volume of transactions, along the lines of the tax proposed by Nobel Prize winner James Tobin in the 70s to curb speculation.

The hope is for the financial transaction tax to gather the same sort of political momentum as the controversial issue of bankers' pay at the Pittsburgh summit last September, especially at a time when EU states are trying to find new funds to plug gaping public deficits.

Despite strong initial resistance from the U.S, G-20 leaders had finally agreed to limit bankers' pay, cashing in on public outrage at what was seen as excessive remuneration in an industry emerging from its worst crisis in decades thanks largely to taxpayer bailouts.

Privately, French officials agree the financial transaction tax is likely to prove a tough sell. Even Sarkozy Thursday acknowledged all EU members weren't "absolutely enthusiastic about it."

"We know it's unlikely to fly at the G-20, but France has always been keen to find innovative ways to fund development or climate change and we are prepared to work with Germany" on the financial transaction tax, another French official said. The official stressed the key priority in Toronto is to muster support for plans to establish a global bank levy.

Shortly after taking office, U.K. Chancellor of the Exchequer George Osborne expressed reservations about the idea of a financial transaction tax, saying the U.K. instead backs proposals for a global bank tax made by the International Monetary Fund. Canada, a vocal opponent of the bank levy, Thursday also rebuffed the proposed tax on financial transactions.

The U.S. hasn't commented on the plan so far, but rejected the idea when it was floated by the then U.K. Prime Minister Gordon Brown at a G-20 meeting in Scotland. An official from the U.S. Treasury said Friday that Washington's position on the matter hasn't changed.

A person close to the IMF said the report to be submitted to G-20 leaders next week will mention the idea of a financial transaction tax, while making clear it isn't the best way to make the banking sector cover the cost of future crises or to limit systemic vulnerabilities. The report will also point out the concern that the cost of such a tax would be passed on to clients, and that it doesn't necessarily target the riskiest types of trades.

Some observers said it won't be easy to win the support of emerging countries on a financial transaction tax to fund efforts to halt climate change, after the Copenhagen summit failed to reach an agreement on the issue mainly because of opposition from developing countries.

More importantly, experts point out, such a tax can be easily circumvented and could therefore create competition problems unless it is applied globally.

"You can argue that it's tricky to de-localize banks as you have to move staff, but there is nothing easier than de-localizing financial transactions... All you have to do is move an electronic trading platform," Dominique Barbet, senior economist at BNP Paribas said. It is a particularly easy thing to do on the foreign exchange market, which is the most global, he pointed out.

If a transaction tax were applied on certain European equities markets, for instance, trades would move to a neighboring marketplace, which would eventually result in liquidity drying up.

"In the long run it is an inefficient tool to fight speculation, as it leads speculation to move to even darker corners of the financial system," Barbet said.

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