George Osborne has claimed that a European Union plan to tax financial transactions with ties to participating nations is "poorly designed" and "badly-timed", warning that it would hamper growth in the region.
Responding to European financial services lobby groups who had voiced concerns over the planned levy, the Chancellor said that the tax would undermine the single market and called into question the European Union's commitment to growth.
Two months ago, Britain launched legal proceedings against the ?35bn (£30bn) tax on financial transactions agreed by 11 European Union members earlier this year. The UK lodged the challenge at the European Court in protest at the spillover effects the private agreement might have on the UK economy.
As it stands, any trade in euro-dominated financial instruments and any transaction with a bank from the 11-nation group, or one of its overseas branches, would be subject to the tax - regardless of where the deal took place.
The Chancellor again raised concerns about this aspect of the levy in a letter to the lobby groups, saying Britain believes the tax is "unlawfully extraterritorial" and that the country objects to the establishment of a tax that will penalise financial institutions in non-participating member states.
Mr Osborne called for the tax to be limited in its scope, writing: "If the FTT is to proceed then I believe it should be significantly scaled back, with the objective of growth central to the thinking of policymakers in any redesign. The UK stands ready to support in these discussions."
There have already been suggestions that European countries pressing for the tax are rowing back on their plans in the face of international opposition and concerns about the economic damage the levy could cause.
Last month, it emerged that a fundamental overhaul of the original proposal was being considered. Initially, the tax was designed as a 0.1pc on equity and debt transactions and a 0.01pc tax on derivatives, and was scheduled to be in force by January 2014. However, the tax rate on equity and debt could be reduced, and the levy imposed solely on shares from next year.
The tax - which has drawn criticism from figures including France and Britain's central bank governors - could end up raising just a tenth of the ?35bn originally hoped.
European financial services lobby groups - including the European Banking Federation and European Savings Banks Group - had written to the Chancellor in May expressing their concern over the levy.
"The industry strongly believes that EU policy-makers are seriously underestimating the dramatic consequences that the European Commission’s proposed FTT will have on European financial markets and by extension on growth and employment in Europe and the European economy as a whole," they wrote.
"Particularly at a time of unprecedented economic uncertainty, introducing an FTT based on a territorial scope limited to 11 Member States will put an extremely high pressure on these countries’ financial services operators and will significantly increase their governments’ dependence on financial markets outside the FTT zone and outside Europe."
They warned that the effective tax rate of the FTT on securities could be much higher than the headline rate of 10 basis points - claiming that in some cases this may be as much as ten times higher - because of the chain of trading and clearing that lies behind most securities transactions.
Mr Osborne said he shared the concerns of the groups, adding that the planned tax "contains numerous design flaws".
"One such flaw is the absence of an exemption for market making. This is a key feature of other financial transaction taxes that have been introduced, including UK stamp duty and the French and Italian transaction taxes. It mitigates the so-called 'cascade' effect'," he said.
The Chancellor warned that the planned tax would hinder EU growth by disrupting the diverse markets used by corporate groups to raise financing for long-term investment and would undermine the single market by splitting the tax treatment of derivatives into two regimes.