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By John O'Donnell and Huw Jones
BRUSSELS/LONDON, Jan 22 (Reuters) - The European Union's topcourt has dismissed Britain's challenge to a law on banning theshort-selling of shares in market emergencies, dealing a blow toUK attempts to limit the influence of EU rules on the City ofLondon.
British Prime Minister David Cameron had been seeking tolimit EU controls on London, the bloc's biggest financialcentre, reflecting a broader attempt to renegotiate thecountry's membership of the EU ahead of a promised referendum onstaying in the bloc.
But the court's ruling means British regulators would not beable to opt out of the short-selling law, which gives theEuropean Securities and Markets Authority (ESMA) power to banbets on falling share prices in instances which it sees as athreat to markets or the stability of the EU financial system.
London has traditionally been less keen on such a ban thanother centres, seeing it as a short-term impediment to marketliquidity which ultimately is the best determinant of a stock'svalue.
"The power of the (ESMA) ... to adopt emergency measures ...in order to regulate or prohibit short-selling is compatiblewith EU law," the Luxembourg-based court said in a statement onWednesday.
"As all the pleas in law relied on by the United Kingdomhave been rejected, the Court dismisses the action in itsentirety," it said.
Short-selling refers to the sale of borrowed shares in a betthe price will fall so they can be bought back more cheaply toturn a profit. It remains controversial because some regulatorsbelieve it can add to stock market weakness at times of crisisor great volatility.
Britain's finance ministry, which mounted the challenge,said it was "disappointed" by the ruling and would respond infull at a later date.
"We've consistently said we want tough financial regulationthat works, but any powers conferred on EU agencies must beconsistent with the EU Treaties and ensure legal certainty," theUK Treasury said.
Polls suggest Cameron's government faces a drubbing in May'sEuropean Parliament elections by the anti-EU UK IndependenceParty (UKIP), whose leader Nigel Farage said: "The institutionsin Brussels despise the City of London and what they see as itsAnglo-Saxon practices.
"We demand that the British government has control overBritish industry. This ruling exposes their impotence. The Cityis totally at the mercy of the European Commission."
CLOSER TIES
The British Bankers' Association, a lobby group whosemembers include Barclays, RBS and Lloyds, said the UK should build closer ties with the EU anddevote more resources to influencing its financial reforms.
London is home to the London Stock Exchange and isthe EU's biggest share trading centre. Britain has mountedseveral challenges to EU rules in a bid to draw a red line onhow much more power over its financial sector can be delegatedto EU supervisors.
Cameron has promised a referendum on UK EU membership in2017, assuming his Conservative party win an election due in2015, and the bloc's euro zone countries are forging closer tiesthrough the creation of a so-called banking union, a move manyin the UK fear will sideline British interests.
"This decision could give the new European Parliament andthe European Commission the green light to confer more powers onthe regulatory supervisors," said Alexandria Carr, a regulatorylawyer at Mayer Brown.
An advisor to the court had sided with the UK in an opinionlast September, saying the emergency power went beyond what thewatchdog could do under the EU treaty provision used to approvethe law.
But the court ruled that under the short-selling law, theESMA's power was "precisely delineated" so it could only goabove the heads of national supervisors if they had taken noaction to deal with disorderly markets.
Lawyers have said that if Britain had won the challenge, itcould have forced the EU to row back on various financial rulesin the pipeline.
Britain is also challenging three other EU rules: A cap onbankers' bonuses; plans for a financial transaction tax; and theEuropean Central Bank's attempt to force some clearing houses torelocate to the euro zone.
