Tensions mounted between the EU’s big economies as Alistair Darling was backed by Germany in resisting moves towards pan-European oversight of banks and financial groups.

The Chancellor was backed by Peer Steinbrück, his German counterpart, is seeking to limit scope for proposed new cross-EU financial watchdogs to dictate to national regulators such as Britain’s Financial Services Authority.

At a meeting of European finance ministers in Luxembourg, Mr Darling dug in his heels against plans by Brussels for the creation of two new regulatory bodies to police banks and try to prevent a repeat of the present financial crisis.

Today’s opposition from Britain, with partial support from Berlin, set the stage for a potential row among EU leaders when the issue is debated at a Brussels summit at the end of next week.

The contentious plans, drawn up by the Jacques de Larosière, a senior French civil servant, are strongly backed by Paris and other EU member states. But the Treasury is wary of any encroachment by the EU over policing the City.

In particular, Britain is unhappy that the Brussels scheme would hand dominance of a new “European Systemic Rick Council” to monitor any build-up of risks in the financial system to the European Central Bank. The Treasury points out that only 16 out of 27 EU countries are members of the euro with a significant ECB role.

The Treasury also objects to the extent of powers for a second body that would set financial rules for supervising banks, insurers and markets across the EU and would have binding authority over national regulators such as the FSA. Britain and Germany argue that if national governments must foot the bill for any bank bailouts, national authorities, rather than EU bodies should continue to play a leading role since big costs to taxpayers could result.

“There is a principle here — that taxation is clearly a matter for member states. It is not a European Union matter,” Mr Darling said. His concerns were echoed by Mr Steinbrück.

The British-German stance provoked a riposte from France. Francois Fillon, the French Prime Minister, said in Paris: “Several member states, including the United Kingdom, still have reservations on this. Our job is to show them that we can no longer hold back on a system that failed.”

EU finance ministers are under pressure to deliver on commitments that financial markets and institutions operating across borders will be better policed in the wake of the present crisis, and that national sovereignty will not prevent them from cooperating fully.

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