The chairman of the Financial Services Authority last night attacked heavy-handed European legislation in response to the financial crisis on the day the European Union announced a market clampdown.
In a speech at the Mansion House, Lord Turner said pending European rules could reduce the UK financial authorities' ability to act in Britain's interests.
He told his City audience: "European capital adequacy regulation should enforce minimum standards across the European Union, but it should leave national authorities free to exceed and vary them above the minimum.
"The idea that securing the single market requires the harmonisation of maximum as well as minimum standards is simply wrong and potentially harmful."
Lord Turner made his warning after Brussels unveiled tough new measures to rein in high frequency trading and exert more control over commodities, equities and off-exchange derivatives.
The long-awaited measures, known as Mifid, call for high-frequency traders to be properly regulated and for rules to limit them moving in and out of markets. The use of computer programs to trade securities in an instant has been under attack for exacerbating market volatility.
Commodity traders have also been accused of driving up world food prices. Mifid proposes setting position limits for commodity derivatives across the region if national rules were judged ineffective.
Britain has been fighting a rearguard action against a deluge of European rules designed to tighten up markets that have helped drive the growth of the City.
The European Commission claims its clampdown will make markets safer and more open. Michel Barnier, Europe's internal market commissioner, said: "Financial markets are there to serve the real economy, not the other way around."
However, critics argued the cost of implementation would cut banks' profitability and that the rules could reduce market liquidity and limit services banks can provide for businesses.
Munib Ali, a director at PwC, said: "Despite the further clarity, firms will remain concerned about the substantial costs the regulation will impose and the detrimental effect on bottom line profitability."
Other Mifid measures include a regulation of "dark pools" – off-exchange trading between two parties. Insider trading will also be punishable by fines of at least 10 per cent of annual sales.
Governments and MEPs now have to agree a final version of Mifid.