UPDATE 1-EU Parliament report slams hedge-fund directive

* Rules "poorly constructed, ill-focused and premature"

* Warns of limited choice, impact of leverage limits

By Laurence Fletcher

LONDON, Nov 6 (Reuters) - A report for the European Parliament attacked a proposed EU directive to regulate hedge funds as "poorly constructed, ill-focused and premature", in a blow for lawmakers who have demanded tough rules for the sector. The impact assessment by Europe Economics said there was a "strong case" for additional regulation but said "the rationale for a directive of this form is weak". The report was commissioned by the European Parliament's Committee on Economic and Monetary Affairs.

The report is a setback for supporters of the directive, which has come in for heavy criticism by the hedge fund industry. The European Parliament is co-decider on a new hedge fund law and has been the most vocal in demanding rules to regulate the industry.

The report said the rules, which would cover alternative investment managers across the 27-nation bloc, could be viewed as protectionist and warned of potential retaliation by rival jurisdictions.

It also warned the rules would lead to "a very significant restriction on EU investor choice", while low limits on borrowing would put many hedge funds out of business. (To read the Reuters Hedge Fund Blog click on blogs.reuters.com/hedgehub; for the Global Investing Blog click here) (Additional reporting by Huw Jones, editing by Will Waterman)