* Fear that European regulation drive too political
* Concern over UK representation in EU financial regulation
* Commods cannot function freely without short selling
(Combines previous stories, adds background)
By Michael Taylor and Pratima Desai
LONDON, Dec 2 (Reuters) - The London Metal Exchange (LME) warned on Thursday that the drive towards greater European financial regulation lacks sufficient UK representation and could become too political.
LME Chief Executive Martin Abbott also told the UK Parliament's Treasury Committee in London that short-selling is essential to the functioning of commodities markets.
France is lobbying for commodity markets to come under the jurisdiction of the new European Securities and Markets Authority (ESMA), a body due to open in January 2011.
"We have a concern about the level of UK representation on ESMA, were ESMA in fact to become the dominant regulatory body," Abbott said.
The UK, home to Europe's most liquid commodity markets as well its biggest financial market, could be outvoted as a lone voice on ESMA and is seen as having the most to lose from overbearing regulation.
"The problem that we have, therefore, with the concept of another layer or a different type of regulation coming from Europe is that it will necessarily come from countries that have no expertise in regulating our type of market," Abbott said.
"We're hopeful that the European regulators will recognise where the areas of excellence are in the European regulatory framework, and the area of excellence in commodity regulation is here in London," he added.
SHORT-SELLING
In September, the European Union unveiled a blueprint to curb or ban short selling and tighten controls on derivatives -- including commodities -- in one of its most ambitious financial reforms since the economic crisis unfolded.
Market players take short positions in metals and other commodity markets by selling material they do not own, on expectations they can buy it back at a cheaper price at a later date.
"It is not possible for commodity markets or for their participants to function, without freely available short selling," Abbott said. "It is utterly essential to the commodity markets."
"This is an area, not of semantic difference but of critical difference," he added.
The U.S. futures regulator, meanwhile, intends to unveil on Dec. 16 its long-awaited revised plan to limit speculative positions held by commodity traders.
U.S. lawmakers are expected to pressure Europe to follow in its footsteps by clamping down hard on speculation to prevent an exodus of business from one region to another.
Britain's financial regulator recently said it had received a complaint over plans for physically backed base metal exchange-traded products, reflecting fears these products could tip a finely balanced copper market into deficit and distort prices.
At the LME's annual dinner in mid-October, Abbott said that large physical base metals positions held by ETPs could be subject to the exchange's lending guidelines.
These guidelines, designed to preserve an orderly market, govern the cost at which metal must be lent or made available to other market players by holders of dominant positions.
(Editing by Jane Baird)