Nov. 6 (Bloomberg) -- U.K. Business Secretary Peter Mandelson will say today that the European Union’s proposed hedge fund rules risk choking off investment needed to help the bloc move out of recession.

“It is vital that this is fully consulted on and carefully designed,” the Mandelson will say in a speech in Brussels, according to a text released in advance by his office in London. “We have to make sure that we don’t cut off important sources of venture capital or do anything that makes it harder to manage venture capital investments within the Single Market.”

Mandelson, a former EU trade commissioner, is speaking a month after Adair Turner, chairman of the U.K. Financial Services Authority, said the measures were “overly prescriptive.” The FSA estimates the rules may cost fund managers 4.6 billion pounds ($7.6 billion) in compliance costs.

The EU’s proposals would require hedge fund managers and private-equity firms overseeing at least 500 million euros ($740 million) to report to regulators. The directive is one of several measures the EU has proposed in the wake of the worst financial crisis since World War II.

Mandelson will also call on the European Union to consider launching its own venture capital fund as he warns that its current state-aid rules prevent governments supporting industry.

“Our rules need to encourage private capital to invest and innovate, and state aid rules need to provide the right kind of space for governments to encourage and facilitate such investment,” he will say.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

Last Updated: November 5, 2009 19:00 EST