The Financial Services Authority today admitted that companies listed on the London Stock Exchange could be burdened by draconian American securities laws if the exchange is taken over by a US rival.

Against the backdrop of a potential bid for the LSE by Nasdaq, Callum McCarthy, the City watchdog's chairman, said: "Theoretically, in the longer term, a new entity might seek to achieve further benefits from rationalisation of its regulatory structure.

"This could at the extreme involve the LSE no longer being subject to UK regulation."

Mr McCarthy was speaking after discussions between the FSA and its American counterpart, the Securities and Exchange Commission, last week.

The talks took place after New York-based Nasdaq built a 25 per cent blocking stake in the LSE following the withdrawal of its $4.2 billion offer for the UK exchange in March.

The FSA said today's comments were designed to "stimulate debate" on the issue of potential foreign control of the LSE. They come amid concerns that London risks losing its appeal for foreign companies and as a wave of consolidation washes through international exchanges.

In particular, London's investment bankers will be alarmed at the prospect of America’s strict Sarbanes-Oxley legislation holding sway on this side of the Atlantic.

The act's strictures, designed to rebuild confidence after a wave of US corporate scandals including the collapse of Enron, are widely believed to have prompted several companies to choose London over New York as their corporate base.

For example, Rosneft, the Russian oil giant, today confirmed plans for its highly anticipated initial public offering and said shares would be offered in both London and Moscow beginning on July 14.

A spokesman for the FSA said that Mr McCarthy’s statement was designed to address "every possibility". In it, the FSA also sought to assuage fears that US laws would automatically be foistered on London companies.

"Neither the FSA nor the SEC consider that US ownership of the LSE, in and of itself, would result in US regulations, including Sarbanes-Oxley, applying to companies listed or quoted on its markets or member firms of the LSE," Mr McCarthy said.

After its series of meetings with the SEC, the FSA today said some aspects of integrating the LSE with a US exchange such as linking up technology would be relatively straightforward.

However, Mr McCarthy warned that "further integration steps could lead to the creation of a single market, covering all the securities of both exchanges with access by common members serving investors in both jurisdictions."

"This would require compliance with the rules of both jurisdictions unless the differing regulatory frameworks were to be aligned," he said.

Shares in the LSE were up 6p at 1,093p in early aftenoon trade. To track the stock click here.

Shares in NYSE Group opened higher, rising as high as $58.68 in early trading, before slipping back to $57 on the New York Stock Exchange.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive