While Germany was hopeful that agreement could be reached on a voluntary code of conduct for the trillion-dollar hedge fund industry "in the next few months," the United States and Japan appeared as reluctant as ever to sign up to such a scheme.

"Any inappropriate regulation that could hurt free market mechanisms should be avoided," Japanese Finance Minister Koji Omi told journalists after bilateral talks with US Deputy Treasury Secretary Robert Kimmitt. "Japan and the US agree on that."

Omi's comments will come as a blow to German Finance Minister Peer Steinbrück, host of a meeting of Group of Eight finance ministers this weekend, who is spearheading a campaign for a system of self-regulation for the industry.

Germany has repeatedly expressed concern over potential risks to financial stability from hedge funds, highly speculative and aggressive investment instruments. And Berlin has long campaigned for increased transparency and even regulation of the largely uncontrolled sector.

But any such plans have consistently run up against fierce resistance, particularly in the US and Britain, where most of the funds are based.

Moderate progress

At a press briefing just before the G8 finance meeting officially got underway, Steinbrück insisted that progress was being made.

The minister, however, acknowledged that drawing up a blue-print for self-regulation of the industry would be a long process.

"Nobody has ever announced that we will come to a clear result," Steinbrück said.

"These are expectations that we have not set ourselves. We have our medium-term objectives and I'm sure that by the end of this presidency, we will have come further than where we are at the moment," he said.

The debate was a "process" which will continue "at least until the end of the German presidency" of the G8.

It was of secondary importance "whether we will come to a specific code of conduct by end of this year or in 2008 ... so long as we get there," Steinbrück said.

Just a prep meeting

The finance ministers of Britain, Canada, France, Germany, Italy, Japan, the United States and Russia were meeting in Potsdam, just outside Berlin, this weekend, to prepare for the bigger summit of government leaders in June.

In addition to hedge funds, the ministers were to discuss a wide range of topics, from ways of strengthening financial market stability, supporting sound governance in Africa.

Steinbrück, who has already acknowledged that agreement was unlikely before the wider G8 summit of government leaders in the plush seaside resort of Heiligendamm in early June, said Friday discussions had progressed since the topic was first discussed at a meeting of G7 (G8 minus Russia) finance ministers in Essen in February.

He also suggested that the idea of self-regulation -- where the funds themselves would implement the rules and make sure they were adhered to -- had the support not only of governments and institutions such as the ECB but also within the banking sector and even the industry itself.

"We've struck a nerve", he said. "The discussions we triggered in February were worth it."