The European Union and the United States should align their rules for money market funds to avoid European funds relocating across the Atlantic, a senior regulator in Ireland said on Wednesday.

Unlike the United States, the EU is considering imposing a cash buffer on major money market funds as part of efforts to regulate the shadow banking industry, which deals in trillions of dollars in assets, but operates outside the mainstream banking sector.

At a conference in Dublin, Patrick Brady, director of policy and risk at the Irish central bank, warned that a divergent approach could create more problems for European regulators.

"There should be sufficient alignment across the Atlantic so that there is no distortion in the location of money market funds; money market funds located in the U.S. or indeed in Cayman, can invest in European banks and, therefore, present as much of a systemic risk for Europe as money market funds located in Europe," he said.

Money market funds hold short term financial instruments such as deposits and commercial paper and are used by big companies to park money and manage cash flows.

During the 2007-09 financial crisis a rush of withdrawals from money market funds helped to freeze bank and corporate funding markets, putting regulators under pressure to reduce the risks posed by the sector.

Last week, the U.S. Securities and Exchange Commission (SEC) proposed sweeping changes to the structure of its $2.9 trillion money market funds industry, including the possibility of liquidity fees.

"The SEC's consultation document is tremendously detailed and runs to almost 700 pages," said Brady. "The money market funds reform debate on this side of the Atlantic is, so far, lacking in this level of detailed analysis."

Brady said the Financial Stability Board, the regulatory task force for the G20 group of economies, and global securities regulator, the International Organization of Securities Commissions (IOSCO) could possibly take up the issue if the United States and Europe could not align their regulatory approaches.

Along with France and Luxembourg, Ireland is a major center for the 1 trillion euro money market fund industry in Europe and fears tougher EU rules will trigger an exodus of funds from the region.

The European Commission has not yet issued its formal proposal to regulate money markets but under a draft law, a copy of which was obtained by Reuters last month, about half of the region's money market funds would have to hold three percent of the value of their fund in cash to help shield them from the risk of a run by investors.

The industry is hoping for a last minute change of heart by the EU's European Commission, which is writing the draft law that will need approval from EU states and the European Parliament to take effect.

But an EU official, speaking to Reuters on condition of anonymity, said last month that the buffer was likely to remain in the final proposal, due later this month, but funds could be given time to reach that level.

(Reporting by Carmel Crimmins; Editing by Louise Heavens)