* EU plans to adopt U.S.-style supervisory model
* Euro clearing seen key to currency area's financial stability
* Forced relocation could be required as last resort (Adds lawyer reaction)
LONDON, June 13 (Reuters) - The European Union plans to give itself powers to move euro clearing business away from London's financial sector to the EU after Brexit and adopt a model closer to that operated by the United States, a source close to the situation said.
The financial industry has warned that forced "relocation" would split markets, bump up trading costs and diminish the status of the euro - as well as threaten thousands of jobs in the City of London.
The draft law due to be published later on Tuesday would, as a last resort, force euro-denominated clearing business to shift from London to the bloc if the volume was deemed by Brussels to be systemically important, the source said.
The bulk of clearing in euro-denominated derivatives is performed in London and involves a third party standing between two sides of a trade to ensure its smooth and safe completion.
The European Central Bank (ECB) and euro zone policymakers have long wanted control over euro clearing, saying it is core to the single currency area's financial stability and would be outside the EU's regulatory sphere once Britain leaves the bloc in 2019.
Under the draft law, if the European Securities and Markets Authority (ESMA) decides that a non-EU clearer is handling "systemically" important volumes of euro-denominated business, a system of "enhanced supervision" would be introduced, the source said.
This would mimic how U.S. regulators already have direct oversight of London clearing houses that handle dollar-denominated instruments, including direct access to sensitive data.
The first aim of the law is to centralise supervision of EU-based clearing houses, with ESMA taking the lead, backed by central banks such as the ECB.
At present, national supervisors oversee clearers.
The second aim is to build on the existing system of "equivalence", whereby a non-EU clearer can serve customers in the bloc if it complies with rules that are similar to the EU's.
"If enhanced supervision does not work because it is so systemic, then there can be a decision to require relocation. That is a last resort," the source said.
ESMA would have to make a relocation recommendation, with input from the ECB, but the European Commission would take the final decision.
The European Commission decided not to include quantitative criteria for "systemic" clearing houses, such as caps on clearing volumes, leaving ESMA to make assessments case by case.
Simon Gleeson, a regulatory partner at international law firm Clifford Chance, said there is no question of UK clearing being forced to relocate.
"The issue is whether and to what extent the EU wishes to prevent EU banks from clearing euro trades outside the EU," Gleeson said.
"I think what is really going on here is the EU trying to create a bargaining chip that it can employ to get a more substantial say in the way that London clearing is regulated post-Brexit."
The draft law will need approval from EU states and the European Parliament.
Most euro-denominated clearing of derivatives is performed by LCH, a unit of the London Stock Exchange and the largest clearer of interest rate swaps used by companies to hedge against unexpected moves in borrowing costs.
LSE chief Xavier Rolet said on Monday that relocation would have little financial impact because it has a clearing house in Paris that is fully authorised under EU rules.
A global derivatives industry body warned on Monday that shifting clearing of euro-denominated derivatives from London to the European continent would require banks to set aside far more cash to insure trades against defaults, a cost that would be passed on to companies.
Officials from the Bank of England, which supervises LCH, have warned that euro clearing could shift to New York, but any U.S. clearing house that became a "systemic" clearer of euro-denominated instruments would also come under the new EU rules.
Details of the draft law were first reported by the Financial Times on Monday.
(Editing by Alexander Smith and David Goodman)