* Banks say stock exchanges exaggerate dark pool volumes
* Say only 16 pct of Europe trade takes place in dark pools
* Regulators looking to tighten dark pool rules
* Dark pools on the rise through electronic trading
(Adds data on European trading)
By Luke Jeffs
LONDON, April 20 (Reuters) - Investment banks launched a fresh defence of "dark pool" share trading, saying the practice is not nearly as widespread as suggested by Europe's stock exchanges and should therefore pose few regulatory concerns.
Only 16 percent of European trading takes place in secretive dark pools -- which enable market parties to trade shares without being seen by others -- a trade body said, well below the 40 percent that has been quoted by stock exchanges.
"The current reporting requirements cause confusion and can result in misleading claims, as our research shows," the investment banks' Association of Financial Markets in Europe (AFME) said in a statement on Wednesday.
"This is of concern as it suggests that policy decisions are driven by misinformation or misunderstanding."
European share trading totalled just over 1 trillion euros ($1,440 billion) in March, Thomson Reuters data show, meaning 160 billion euros ran over bank dark pools even under their own lower estimate, generating solid fee income.
The AFME's opponent -- the Federation of European Securities Exchanges (FESE) -- is urging the European Commission to adopt tighter rules on trading that takes place away from exchanges, including in bank-owned dark pools.
The timing of the spat is crucial as the European Union weighs up new restrictions on bank dark pools and rewrites its 2007 Markets in Financial Instruments Directive (Mifid), which opened up trading markets for competition.
Regulators have not been outspoken about what changes they plan, sparking heeavy lobbying from both sides.
Banks such as Citigroup, Goldman Sachs, Morgan Stanley, Nomura and UBS have always traded away from exchanges for fear of offering rivals crucial clues as to their investment strategies.
Fund managers and banks increasingly use dark pools for their largest, market sensitive orders because the explosion of electronic trading on exchanges has made these markets more sensitive to large or block orders.
Yet exchanges believe bank dark pools are dangerous because they lack transparency, meaning clients don't know whether they are getting the best price, or if they are being picked off by predatory proprietary traders.
The exchanges insist trading on their transparent, public markets is safer because all participants can see prices and the exchanges monitor trading by their members to guard against improper practices.
But the banks counter that their dark pools, or broker crossing networks, are important tools for clients because they allow firms to trade without causing ripples.
The European Commission is keen to pass new rules to update its landmark Mifid act that broke European exchanges' monopolies on share trading by allowing alternatives venues, known as multi-lateral trading facilities. (Editing by Douwe Miedema, David Holmes and Mark Potter)