A key committee of Euro MPs has backed a directive that may lead to greater supervision of the hedge fund industry.
The vote in Strasbourg comes one day ahead of a meeting in Brussels of EU finance ministers where hedge fund regulation will be under discussion.
The Tuesday meeting will be an important test for the new UK chancellor, George Osborne, with 80% of European hedge funds based in London.
Many blame hedge funds for worsening the effects of the financial crisis.
The European Commission wants new rules to overcome what it sees as gaps and inconsistencies in existing, national regulatory frameworks.
However the US government has argued the EU plans are protectionist.
And London-based fund managers have said the proposals will make it impossible for funds based outside the EU to raise money within Europe.
But the BBC's Hugh Schofield in Strasbourg said the aim was to make the hedge funds more transparent and prevent the market instability they're said to have encouraged during the financial crisis.
It is also hoped there would be stricter reporting and registration rules, and guidelines to limit pay.
Our correspondent added that "a European financial supervisor would keep checks on the amount of borrowing hedge funds can take on".
Meanwhile, the EU proposals include new guidelines on short selling, including requiring managers regularly to disclose information on important short positions to national authorities.
It is thought Mr Osborne will on Tuesday restate the UK's objections to some of the proposed new regulations.
Hedge funds use sophisticated, complex investment strategies to make returns, and often make money when markets are falling.
The EU legislation also seeks to curb highly-leveraged funds - that is, funds that borrow a high multiple of their capital to increase the size of their investment.