UPDATE 1-EU holding line against passporting for British banks after Brexit

(Adds detail on differences in regulations)

BRUSSELS, Jan 31 (Reuters) - European Union negotiators see no room for discussion with Britain on maintaining "passport" access to EU financial markets for its banks after Brexit, but they are willing to look at free trade in the sector, diplomats said.

Speaking after EU officials briefed representatives of the other 27 member states on Tuesday, several diplomats who were present told Reuters that there appeared to be some differences among governments over how much access to EU customers they were willing to give banks and other financial firms from London.

But, said one said, "On financial services, it is nowhere close to the access one gets as a member state or through the EEA (European Economic Area). There will be no passporting rights."

Michel Barnier, the EU's Brexit negotiator, has already made clear in public that Brussels will reject suggestions from the City of London that institutions maintain the "passports" that allow them to offer services across the 28-nation bloc.

He has, however, said that some British regulations could be treated as "equivalent" to the EU supervisory regime, giving some favourable access in some types of business.

That would mean banks in Britain, including the London subsidiaries of global players from the United States, Japan and elsewhere, losing the automatic right to offer the same services in any other EU country. However, they might offer specific products, where UK regulations were deemed "equivalent".

Otherwise, banks may set up new EU subsidiaries, involving extra cost, including having to inject capital into those units.

British firms have been pushing to be granted a sweeping "equivalence" package, but EU officials and diplomats say that is not workable, mainly because of difficulties in agreeing a legal way to ensure that British rules do not diverge from the EU's.

At Tuesday's meeting, part of a series of "seminars" by the EU executive team with national envoys as the EU prepares for talks in April on a post-Brexit relationship, indicated a broad consensus behind that view, several diplomats said.

Because Britain was leaving the EU's single market and rejecting its rules, including arbitration by the EU court, one said, "its clear that they will lose passporting rights as this is part of the internal market and our regulatory regime.

"When they do that, the only other alternative is what we have in some of our FTAs," the person added, referring to free trade agreements the EU has with other countries.

Barnier has said that free trade accords have in the past offered only limited access for financial services providers, he has said there was a willingness to look at the possibilities of equivalence.

Some envoys expressed caution about how far that could be done. Others were more open to closer cooperation.

"Equivalence" would be granted "case by case" to certain types of activity, the diplomats were told.

"It will, at best, be much less, and only specifically justified per sector. Thats the rub," one of them said. Some areas of business would not be able to get such a deal.

"The key message was that given the UKs red lines," another diplomat said, "a free trade agreement is the only possible cooperation scheme."

Another participant at Tuesday's meeting said: "The EU offering the equivalence option to the UK in financial services is the best option they can hope for. The presentation ... was pretty straightforward: equivalence is a possibility, if the Brits can agree to not changing their legislation much."

London has, however, been at odds with Brussels on banking rules as a member - it opposed, for example, moves to control executive pay and bonuses - and the government insists it will leave the oversight of the European Court of Justice. And so agreement that rules are in harmony may prove difficult.

EU officials are also looking at how Brussels and London could cooperate on setting regulations that achieved shared goals - as they do with, say, the United States at present. (Writing by Alastair Macdonald, editing by Larry King)