Prospects of an EU tax on financial transactions have been put into question by confusion on how it would work and a legal challenge by the UK.

A six-page-long memo drafted by civil servants in the EU Council last week - seen by EUobserver - indicates cooling enthusiasm among the 11 EU countries which supported the introduction of a financial transactions tax (FTT).

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The officials say the FTT, which includes a 0.1 percent levy on bonds and shares and 0.01 percent on derivative products, would hit repurchase agreements on sovereign bonds, forcing up the cost of financing government debt.

They warn that it could "create an inappropriate burden on short term bonds, repo operations etc, compared to long term bonds."

They also ask a string of questions about the scope and definition of the tax and on how it is to be collected in practice.

One EU source told this website: “There’s still very little clarity on the proposal and so many unanswered questions. Member states do not know how the FTT will actually work nor do they have answers about the impacts. That 11 countries came together to table six long pages of questions … just shows how much uncertainty there is over the [European] commission’s FTT proposal.“

For its part, the UK, a staunch opponent of the levy, last week submitted a legal challenge to the European Court of Justice (ECJ).

Speaking on Friday, (19 April) a spokesman for the UK treasury said that the case had been filed because of potential knock-on effects for countries outside the EU-11.

He added that "a European-only tax would hit people's savings and pensions and hit jobs and growth".

Luxembourg finance minister Luc Frieden over the weekend did not rule out joining the British legal challenge.

He told press on the margins of a meeting of the International Monetary Fund that he is "not sure whether this project of an FTT in Europe will go ahead.”

Under the EU treaties, groups of countries can press ahead with legislation provided that it does not "undermine the internal market or economic, social and territorial cohesion."

A contact from one of the pro-FTT countries said the British objection is about "defending one rather rich square mile," in a reference to London's financial quarter.

France and Germany have led support for the levy, with policy-makers regarding the tax as a way to make the financial sector bear some of the costs of the economic crisis.

The commission says it will reap between €30-35 billion per year for the 11 countries involved, although its impact assessment indicates that the tax could also lead to a 0.3 percent reduction to the EU's GDP.

The EU executive also estimates that it could lead to a 15 percent decline in the trade of shares and bonds and a 75 percent reduction in the volume of derivative trading - widely regarded as the most risky form of financial speculation.

Measures have been put in place to prevent traders from circumventing the system by operating from outside the EU-11.

The use of an "issuance" principle as well as "residence" criteria means that some traders operating outside the FTT-11 would still be liable to pay the tax.