European Union finance ministers have agreed to introduce tougher regulation of the hedge fund industry.
Ministers overrode objections by the new UK government and the City of London, where 80% of European funds are based.
They will now negotiate with the European Parliament to decide the exact shape of the legislation - which is due to come into force from 2012.
However, the final deal would take account of UK concerns, the EU said.
A UK Treasury spokesman said this was a "very good result in the circumstances, the best outcome we could have expected".
But there are concerns about implications for London's hedge fund industry, particularly that the rules will make it harder for fund managers to find investors across the EU's 27 countries.
Some European governments, notably France and Germany, have long suggested that hedge funds pose a risk to the stability of the world's financial system and so need more regulation.
"We are determined to accelerate the pace of regulation," said Wolfgang Schaeuble, Germany's finance minister.
"Up until now this was not regulated. This hole will now be closed."
The EU said the directive it had agreed was aimed at fulfilling commitments made after the financial crisis to regulate "all players in the market that might pose a risk to financial stability".
Hedge funds use sophisticated, complex investment strategies to make returns, and often make money when markets are falling.
The European Commission wants new rules to overcome what it sees as gaps and inconsistencies in existing national regulatory frameworks.
The finance ministers have proposed rules that do not give hedge funds the automatic right to trade across the 27-nation bloc.
Instead, fund managers who wanted to market to the EU will have to qualify through a new passport-style system.
However the UK argues that in exchange for accepting rules on closer scrutiny, fund managers should be given extra benefits - such as more freedom to function across EU borders.
There are also plans to make it much tougher for non-EU hedge funds to sell their products across the single market.
Andrew Baker, chief executive of the Alternative Investment Managers Association, said the plans were "very disappointing" and would "effectively ban EU investors from investing outside Europe".
"This will have negative social consequences across the EU because it will be European institutional investors like pension funds who will be affected," he said.
The US government has also objected to the plans to restrict trade, labelling them protectionist.
Other aspects of the proposed regulation include:
- Legislation for private equity investors - in particular the way they treat other shareholders and employees when they buy a big stake in a company
- Stricter reporting and registration rules, and guidelines to limit pay
- Creating a European financial supervisor to keep checks on the amount of borrowing hedge funds can take on
There are also proposals for new guidelines on short selling, including requiring managers to regularly disclose information on important short positions to national authorities.
Short selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.
The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.
On Monday, a key committee of Euro MPs backed a directive that may lead to greater supervision of the hedge fund industry.
Finance ministers must now negotiate with the European parliament over the legislation. Talks will begin on 31 May before a final vote in July.