BRUSSELS - European Union states on Tuesday backed a watered-down reform of regional supervision of money managers and other financial firms, top EU officials said.

The plan is meant to avoid a situation under which, after Britain leaves the bloc, national regulators can offer sweeteners to London-based financial firms.

Smaller EU states had tried to completely block the reform, fearing it would reduce their power to attract foreign financial firms.

But after pressure from larger states led by France and Spain, a compromise was reached by EU finance ministers meeting in Brussels.

Meeting chairman Eugen Teodorovici, Romania's Finance Minister, said talks with EU lawmakers would begin this week to finalise the reform.

In January, the EU parliament adopted a much more ambitious text that would have given EU supervisors more clout.

Negotiators will now need to find a common ground between governments and lawmakers for the reform to become law before EU elections in May.

The compromise also falls short of an initial plan proposed by the EU Commission two years ago.

Financial services commissioner Valdis Dombrovskis said that, while it "does not match the high level of ambition" of that proposal, he could accept the compromise as it was important to move forward with the reform.

(Reporting by Francesco Guarascio; editing by John Stonestreet) ((Francesco.Guarascio@thomsonreuters.com; @fraguarascio; +32 2 287 68 17;))