Banks operating in the European Union dismissed a Franco-German proposal for a tax on financial transactions, saying it would not stabilize markets and could serve to distort them.

The Association for Financial Markets in Europe (AFME), which represents top banks, also said on Wednesday a tax would simply bump up costs for a large section of European industry and hit growth.

Shares in stock exchange operators took a hit after French President Nicolas Sarkozy and German Chancellor Angela Merkel unveiled a plan on Tuesday to tax financial transactions.

The pair, under heavy pressure to restore confidence in the euro zone after a dramatic market slump, did not detail how such a tax would work. That did not stop Austria, Italy and Spain signaling that they too would support the idea.

But Ireland's finance minister, Michael Noonan, said any new tax must apply to all 27 members of the EU and not just the 17 members of the euro zone.

That would need agreement from Britain, the region's biggest financial center and which is opposed to the EU going it alone.

The British Bankers' Association, a lobby group, said: The UK has taken the position that such a tax would only be viable if implemented on a global scale. Otherwise the consequences would be a distortion in the global markets.

Germany's cooperative banking association said any tax would fail to bring stability to markets if it only operated in the euro zone. For all the legitimate efforts at stabilizing financial markets, we feel a financial transaction tax which is limited to the euro zone is not effective, the BVR said.

European Central Bank President Jean-Claude Trichet has said in the past that unless such a tax was introduced globally, it would not work.

German exchange operator Deutsche Boerse, whose shares were down 6.0 percent at 8:50 p.m. EDT, said: The tax provides yet another incentive for transactions to move to jurisdictions where it is not applicable, adding it would be a gift for unregulated marketplaces.

Rival bourse London Stock Exchange lost 4.7 percent, following an 8 percent slide in NYSE Euronext shares on Tuesday.

The LSE and NYSE Euronext declined to comment.

PIPE DREAM

A transaction or Tobin tax -- named after economist James Tobin who first proposed one in the 1970s -- has been a near 40-year pipe dream for some policymakers. Calls for such a levy have become more frequent since the financial crisis began unfolding four years, forcing taxpayers to bail out banks.

But the G20 failed to agree amid opposition from the United States, and several countries like Britain have opted to slap levies on bank balance sheets instead.

European Commission President Jose Manuel Barroso said in June a legislative proposal for a financial transaction tax would be presented after the summer to contribute to the EU's annual expenditure.

EU officials said in June a tax would be set at a low level to deter avoidance, for example at 0.01 percent on derivatives transactions and 0.1 percent for bond trades.

Merkel's party has in the past suggested a transaction tax for some or all of the 17 euro zone countries could be a starting point.

We doubt that a financial transaction tax, especially on derivatives, will be introduced in the euro zone as it will damage the local financial industry and tax base without doing any good, said Christian Muschick, an analyst covering stock exchanges at Silvia Quandt Research.

(Additional reporting by Alexander Huebner in Frankfurt, Luke Jeffs, Huw Jones and Douwe Miedema in London, Elena Berton in Paris and Sonya Dowsett in Madrid; Editing by Will Waterman)