By Philip Blenkinsop and Huw Jones
BRUSSELS/LONDON (Reuters) - Britain suffered an embarrassing defeat in its attempt to block the European Union's new limits on bank bonuses on Thursday, withdrawing its legal challenge after an adviser to the bloc's top court made clear it was unlikely to succeed.
The EU law aims to curb the kind of risk-taking that led to the 2007 to 2009 financial crisis by limiting bonuses awarded from next year to a sum no more than a banker's fixed pay, or twice that level with shareholder approval.
Britain, home to the City of London where most of the bankers hit by the cap are based, said the law would push up fixed pay and goes beyond the EU's powers, a sensitive subject at a time of rising British anti-EU sentiment.
However, Chancellor George Osborne was forced to concede defeat after an adviser, whose opinions are non-binding but are generally followed at least in part by the Luxembourg-based European Court of Justice, said he supported the limit on banker bonuses and that it did not restrict total pay.
"I'm not going to spend taxpayers' money on a legal challenge now unlikely to succeed," Osborne said in a statement. "The fact remains that these are badly-designed rules that are pushing bankers' pay up, not reducing it."
Earlier, an ECJ statement said Advocate General Niilo Jääskinen had suggested the Court of Justice reject Britain's action.
"Fixing the ratio of variable remuneration to basic salaries does not equate to a 'cap on bankers bonuses', or fixing the level of pay, because there is no limit imposed on the basic salaries that the bonuses are pegged against."
Jääskinen said that bonuses were an internal market matter as they relate to risk taking at banks that could affect financial stability in Europe.
Legal experts had earlier said Jääskinen's ruling had all but extinguished Britain's hopes of a successful challenge.
Britain's finance ministry said it would look at other ways to reform pay structures.
"It may be necessary to develop standards that ensure non-bonus or fixed pay is put at risk, maximise claw back, or pay senior staff in performance-related bonds," a finance ministry spokesman said.
The defeat hands ammunition to anti-EU campaigners who object to having decisions imposed by Brussels. The UK Independence Party, which rejects the EU's influence over Britain, is hoping to win a vote on Thursday that would give it a second seat in the British parliament.
Barclays, HSBC and Standard Chartered have raised allowances to compensate for the impact of the bonus limit. The EBA has said most of these allowances are illegal.
Bank of England governor Mark Carney and others have said that bankers' fixed salaries may also need regulating.
(Additional reporting by William James; editing by Adrian Croft, Anna Willard and Ralph Boulton)