Fidelity Investments, the largest provider of U.S. money market funds, said on Tuesday it would support imposing a 1 percent redemption fee on large institutional money funds during times of extreme market stress.

The $2.5 trillion money fund industry has been battling U.S. regulators over reform proposals that Boston-based Fidelity and other providers say could wreck the industry. But in recent weeks, Fidelity has acknowledged that institutional prime money market funds are vulnerable to large, abrupt redemptions in times of financial turmoil.

In a speech planned for Tuesday afternoon, Nancy Prior, Fidelity's president of money market funds, put a finer point on Fidelity's views on what it sees as impending regulation.

"We believe that halting redemptions or charging a fee when liquidity is scarce is the only effective means of stopping large, sudden outflows," Prior said in prepared remarks. "This would be a far more effective means of addressing a clearly defined issue within one specific segment of the (money market fund) product."

Prior was due to outline Fidelity's views at the iMoneyNet Investor conference in Orlando, Florida. Fidelity manages more than $430 billion in money fund assets.

Money market funds threatened to freeze global markets during the height of the 2008 financial crisis, capped by investors' rush to flee the well-known Reserve Primary Fund in the fall of 2008 because of its heavy holdings in collapsed Lehman Brothers. The fund was unable to maintain its $1 per-share value, known as "breaking the buck."

Prior conceded that the industry appeared headed down the path of more regulation.

"If the SEC concludes that institutional prime MMFs need further reform, a better approach would be requiring liquidity gates and/or fees that would be triggered only during times of market stress," Prior said in her prepared remarks.

Under this model, she said if a fund's weekly liquid assets fell below a certain threshold, the fund would institute a temporary restriction that automatically would suspend redemptions for a period of time to allow the fund to restore its health.

If the fund's weekly liquidity level continued to fall to a level below another predetermined threshold, shareholders would have the option to redeem. But the redemption would be subject to a 1 percent fee, Prior said.

"Imposing a redemption fee would compensate the fund and its remaining shareholders for the costs of withdrawing liquidity from the fund," Prior said.

(Reporting by Tim McLaughlin; Editing by Jeffrey Benkoe)