* ESMA says "market access" a block to U.S. passports
* European Commission can override ESMA advice
* Lawyers don't expect U.S. passports for long time (Recasts, adds detail, reaction)
By Huw Jones
LONDON, July 30 (Reuters) - The European Union faces a regulatory spat with the United States after the bloc's securities watchdog said it could not give U.S. hedge funds a "passport" to operate across the EU.
The European Securities and Markets Authority (ESMA) advised the EU's executive European Commission that hedge funds from Jersey, Guernsey and Switzerland should be allowed to operate across the 28-country bloc.
This would avoid the current more costly route of needing authorisation in each EU state they want to market their funds. Authorised EU hedge funds get a passport automatically.
ESMA said it could not recommend giving a passport to hedge funds from the United States, one of the world's top centres for the sector, because it risked creating uneven competition.
There were also "significant" obstacles regarding investor protection and monitoring systemic risk, ESMA added.
"ESMA is of the view that in the context of a potential extension of the... passport towards the US, there is the risk of an unlevel playing field between EU and non-EU Alternative Investment Fund Managers as regards market access," the watchdog said in a statement.
EU fund managers need an office in the United States to tap some investors there while an EU passport would allow U.S. hedge funds to reach out to European investors without a physical presence on the continent.
It is for the European Commission to take a final decision on passports and it could still go ahead and authorise them for the United States.
But Jake Green, a financial lawyer at Ashurst, said the issue of "equivalence" of rules between the United States and EU was far too politically sensitive to be addressed under the EU's hedge fund law.
"A U.S. passport looks a very distant prospect," Green said.
Brussels and Washington are already locked in a lengthy dispute over recognising each other's derivatives rules to avoid banks having to comply with two systems which threaten to fragment a global market.
The current system of national authorisations for non-EU hedge funds ends in 2018 when ESMA will advise on whether an extension is needed.
The watchdog is expected to deliver its next batch of passport recommendations early next year.
ESMA said it could not recommend giving passports to Singapore and Hong Kong for now because it did not have enough information.
Reporting by Huw Jones, editing by David Evans and Elaine Hardcastle