(Corrects headline and text to show ban refers to naked sovereign debt selling and not to naked sovereign credit default swap selling)
By Huw Jones
LONDON, May 6 (Reuters) - European Union states have given initial backing to a ban on naked selling of sovereign debt, the bloc's presidency said on Friday.
Hungary said that under the deal it brokered this week a ban on naked government debt selling could only be lifted temporarily under strict criteria to be worked out later.
"The presidency put on the table this proposal addressing concerns about liquidity that seem to be to the satisfaction of countries with these concerns," said Marton Hajdu, a spokesman for the EU presidency.
A naked sale is where the asset is not owned in the first place but the hope is that market prices will have fallen by the time the asset is needed for settlement. It is viewed by critics as short selling or betting that prices will fall.
EU member state ambassadors will review the compromise next week ahead of a meeting of finance ministers on May 17.
"We are very optimistic," Hajdu said.
Hedge funds and other investors have been accused of "speculating" on falls in government bond prices, which exacerbated difficulties for Greece last year, which had to be bailed out by the EU and International Monetary Fund.
The proposal was authored by the EU's executive European Commission.
The European Parliament, which has joint final say with member states, voted overwhelmingly in committee in March to go further than the Commission text and back a ban on naked selling of sovereign credit default (CDS) swaps. [ID:nLDE726259]
The Hungarian compromise is seen by diplomats as staying within parliament's "red lines", and therefore a final first reading deal is seen likely in June or July at the latest.
"We believe that the versions on the table in the Council (of EU states) and in parliament are not extremely divergent, so we see a good chance for a final deal sooner rather than later," Hajdu said.
Under the Hungarian deal, a member state can ask for the ban to be lifted temporarily if liquidity in its sovereign debt falls significantly to below a set threshold.
Details of the threshold would be worked out later.
Britain, which believes the deal gives a new pan-EU watchdog, the European Securities and Markets Authority (ESMA), too much power, appears to have been outvoted. (Reporting by Huw Jones; Editing by Will Waterman)