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* UK fails to overturn plans to cap bankers' bonuses
* Finance minister Osborne warns of "perverse effects" fromnew rules
* Ireland's Noonan says little room to change deal forBritain
By John O'Donnell and Robin Emmott
BRUSSELS, March 5 (Reuters) - Britain was left isolated inEurope on Tuesday after it failed to secure backing to waterdown new EU rules limiting bankers' bonuses, a measure thatcould threaten London's dominance as a financial centre.
The rules, which would limit bankers' bonuses to theequivalent of their salary, or two times their salary ifshareholders agree, are set to be introduced next year and wouldrepresent the toughest bonus regime anywhere in the world.
They threaten Britain's financial industry the most, raisingthe risk that some banks and their top bankers could relocate toother financial centres outside the European Union.
Britain's finance minister, George Osborne, appealed to EUministers to change the rules at a meeting in Brussels, arguingthat the proposed cap would have a "perverse" effect.
"It will push salaries up, it will make it more difficult toclaw back bankers' bonuses when things go wrong, it will make itmore difficult to ensure that the banks and the bankers pay whenthere are mistakes, rather than the taxpayer," said Osborne in apart of the meeting that was broadcast.
But none of the other 26 EU member states was willing tostand with him, and it looks very unlikely that any significantchanges to the rules will be made. Since the rules do notrequire unanimous backing, Britain has no veto over theproposals.
"The space for further negotiation is quite narrow," saidMichael Noonan, the finance minister of Ireland, which as thecurrent holder of the EU's rotating six-month presidencynegotiated the deal with the European Parliament.
Osborne's inability to fend off the reform, the first of itskind globally, underscores Britain's waning influence in the EUand is also likely to fuel deepening euroscepticism in Britain.
"Britain has done a lot to isolate itself from the rest ofthe European Union," said Philip Whyte of the Centre forEuropean Reform, a thinktank. "It isn't exercising very muchinfluence in European debates, pretty much across the board."
Officials indicated that the best Britain could hope for infurther negotiations over the rules in the coming weeks wasperhaps an increase in the amount of bonus that can be deferredand therefore discounted when calculating the total payout.
But Michel Barnier, the European commissioner for financialregulation and an author of the proposals, said the broadparameters would not change. Asked about the possibility of anylegal challenge to the bonus cap, he replied: "Good luck."
Britain's powerful financial sector fears the rules will putLondon at a disadvantage and provoke an exodus of major banksand staff to rival financial centres, although HSBC,one of Britain's largest banks, has said it does not have anyplans at this stage to move its headquarters.
'ENOUGH IS ENOUGH'
German Finance Minister Wolfgang Schaeuble indicated that hewould be uncomfortable with any country being outvoted on thenew legislation, opening up the possibility of some change.
EU officials indicated that any alterations are likely tohave only a slight impact on the total amount of bonus that canbe paid.
"There is very little further we can do for them because wepushed the negotiations to quite a degree, and we got the bestpossible compromise with the parliament," Noonan told reportersbefore the meeting began. "There isn't any more room left."
Schaeuble told ministers he would back a greater flexibilityin how a banker's bonus is calculated, which could allow banksto pay more over the long term, said one official who attendedthe talks.
Britain could also try to push to change the scope of therules, which will apply to all EU bank staff globally,regardless of where they are based.
But any changes will also require the approval of theEuropean Parliament. Othmar Karas, the Austrian lawmaker whodrove the negotiations in parliament, said he did not see anyreason to re-open the deal clinched last week.
While the finance ministers agreed not to finalise the dealon Tuesday, partly out of courtesy to Osborne, there is littleappetite to change it. Officials indicated it would be approvedlater in March or possibly in April. The aim is to put thelegislation in place from Jan. 1, 2014.
Some in the British government believe banks could takelegal action on the grounds that the European Union is goingbeyond its remit in legislating on remuneration, an officialfamiliar with British thinking told Reuters.
AFME, the bank lobby group, stoked speculation, saying "itwould not be surprising" if the industry were gathering "legalopinions". But the European Commission, which writes EU law,said it would be "absurd" to challenge the legality of the cap.
The new rules will not affect most bank staff, who onaverage earn bonuses of up to 30 percent of salary, but targetsenior management and so-called "risk takers", such as traders,whose bonuses can be many times their base salary.
Analysts estimate the law will initially affect around 300to 500 people in each large bank, or around 5,000 people inLondon all told.
