The bloc's financial services chief Michel Barnier proposed in November a third set of rules for rating agencies in as many years. But faced with opposition from some of his fellow commissioners, Barnier dropped one proposed element: publication blackouts on ratings downgrades.

Now, with many lawmakers angry about the timing of Friday's downgrades, that proposal could be revisited.

"What I do think that could happen is some members of the parliament that are in favor of banning publication of negative ratings will try to reintroduce that in the proposal," Wolf Klinz, a German Liberal member of the European Parliament said.

"Some of the socialists and conservatives say it's a good thing to have the option to ban the publishing of ratings if they do come at the wrong moment," Klinz told Reuters.

The original blackout proposal was intended to cover only publication of negative ratings of countries receiving bailouts.

But some politicians could now go further and ask for publication to be banned if it comes at an 'awkward' moment for the country concerned. This could cover election campaign periods, or bailout negotiations, although in practice would be very difficult to define and is considered unworkable by many.

Rating agencies were criticized for awarding high ratings to securities based on sub-prime U.S. mortgages which later became untradeable when home owners defaulted on their loans, sparking a global credit crunch whose effects still reverberate.

FRESH PROPOSAL

The European Parliament and EU states have final say on the draft law that is expected to come into force around 2013. A senior lawmaker said on Monday he will table amendments to reinsert a modified version of ratings blackouts.

"Regarding sovereign ratings we have to organize things better and have rules that are more specific and take into account public debt. I will propose an amendment to that effect personally," Jean-Paul Gauzes, a French centre-right member of the EU assembly, told Reuters.

Such an amendment, if approved, would bar publication of sovereign ratings changes while a country is being bailed out.

The socialists and conservatives form the two biggest blocs in the European Parliament and could push through Gauzes' amendment but it is not clear if all the bloc's members would back blackouts.

"I don't think it will get a majority," Klinz said.

Leonardo Domenici, an Italian centre-left member of the European Parliament, is sponsoring the regulation and had already wanted to reopen discussion on blackouts. He was not immediately available for comment on Monday.

S&P also believes attempts to reintroduce a blackout provision would likely fail.

"This idea has been widely rejected and would lead to more not less uncertainty and volatility in markets," S&P said.

Even without blackouts, the EU is going further than the United States or what was agreed globally by the G20 to rein in agencies. The bloc's latest legislation is largely directed at the global market dominance of the "Big Three" ratings agencies: S&P (MHP.N), Moody's (MCO.N) and Fitch Ratings (LBCP.PA).

Barnier said in a speech in Hong Kong on Monday he wanted to see rating agencies operate in full transparency.

"I am surprised time and time again by the timing agencies choose to make such announcements," Barnier said. "I think it would be right for agencies to take better account of the unprecedented efforts being made by government."

The Italian banking association (ABI) said on Saturday that S&P's downgrades, which included Italy, were irresponsible.

"The ABI hopes the European regulation on the rating agencies will be completed and approved as quickly as possible and that the European Central Bank and central banks reconsider immediately the use of external ratings in their procedures and evaluation models," the association said.

World leaders have agreed to "dilute" the reliance banks have on ratings to calculate their capital buffers but this is proving hard in practice because of the difficulty of finding alternatives.

(Reporting by Huw Jones; Editing by Jodie Ginsberg)

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