By Laurence Fletcher

LONDON (Reuters) - Britain's temporary ban on short-selling financial stocks is irksome for London's hedge funds and is another factor which could help undermine the city's pre-eminent position in Europe as a hedge fund base.

Short-selling is a key trading strategy for hedge funds as they aim to profit regardless of whether a stock is rising or falling, but London's curbs come as rival centres seek to attract hedge funds to bolster their financial sectors.

Switzerland, France, Luxembourg and Scandinavia have all begun to emerge as alternative options for hedge funds looking for lower tax and a higher quality of life.

The European industry could follow the U.S. model and develop in a number of regional centres, although London's upmarket St James's and Mayfair districts are likely to remain the heart of the industry in Europe for at least the time being.

"It's like in the U.S.," said Thames River fund-of-hedge-funds manager Ken Kinsey-Quick. "New York dominated, then in the 90s managers started to spread to Connecticut then all over the U.S.

"London will be like New York today. I don't think it'll give up its pole position but it won't get 100 percent of the business."

Hedge funds managers in London are already facing a tax introduced earlier this year on so-called non-domiciled individuals, under which they must pay a 30,000 pounds-a-year levy after seven years of living in Britain.

Now their freedom to short-sell stocks has come into the firing line after being blamed by regulators, politicians and some market participants for accelerating the collapses in share price of banks such as Lehman Brothers and HBOS HBOS.L.