UK's Osborne, Labour in clash over business policy

* Finance minister accuses rivals of being anti-business

* Osborne says UK recovery plan "not even half done"

* But Labour says Conservative EU policy is anti-business

* Labour says voters not feeling benefit of economic revival (Updates after speech, adds quotes)

By William James

LONDON, May 21 (Reuters) - The two contenders to win Britain's national election next year traded blows over their business policies on Wednesday after finance minister George Osborne accused the opposition Labour party of "pulling up the drawbridge" on foreign investment.

Labour said Osborne was guilty of hypocrisy, arguing that his own Conservative party's promise to hold a referendum on Britain's membership of the European Union by the end of 2017 was spooking business by raising the prospect of a "Brexit".

The clash reflects an emerging trend. With only a few percentage points separating the two parties in the opinion polls, both are trying to persuade the business community that they have the better policies for the economy.

Osborne, in a speech at the Confederation of British Industry, said Britain's economy was recovering, but that his decade-long plan to fix it was less than half-completed.

His speech came on the eve of elections to the European Parliament and took aim at both Labour and the UK Independence Party (UKIP), which wants Britain to leave the European Union.

"Political parties on the left and the populist right have this in common: they want to pull up the drawbridge and shut Britain off from the world," Osborne said.

"It takes advantage of the understandable anxieties of a population unsettled by the pace of globalisation, and peddles a myth that Britain can stop the world and get off."

Labour rejected that, pointing the finger back at the Conservatives, arguing that their plan to hold a referendum on leaving the European Union if they win next year's election was causing huge uncertainty.

"The biggest threat to British business would be walking away from our biggest market - the European Union," said Labour spokesman Chris Leslie.

Osborne said the reforms to the EU that his party was seeking were essential to halt what he said was a damaging and steady shift in decision-making power towards Brussels.

"It is true that those who want Britain to leave the EU now, instead of working to reform it, are taking a risk with our economy," he said.

"But those who advocate membership of this union, whatever the direction it heads in and regardless of the costs it imposes on our businesses, are also taking a risk with our economy."

Labour also advocates EU reform, but has said it is unlikely to hold a referendum before 2020, and only in the event of a major shift in power between Britain and the EU.

"ANTI-BUSINESS"

The two parties' contrasting approaches to business were highlighted this month when U.S. drugmaker Pfizer (NYSE: PFE - news) bid to take over British-based pharmaceutical company AstraZeneca (EUREX: AZNF.EX - news) , a deal the latter has so far rejected.

Labour said it might block the tie-up on the grounds of national interest if it were in power, and accused the government of cheerleading for a takeover that could result in job losses and facility closures.

The government denied that, saying its stance was neutral and that it wanted assurances over jobs and research.

The spat underlined a burgeoning debate over how government should handle big business, and comes ahead of an election where polls shows that perceptions of economic competence will be a big factor in deciding how the public cast their vote.

Labour argues that the Conservatives, along with their junior coalition partners the Liberal Democrats, have failed to tackle a decline in living standards.

Labour has announced policies to freeze energy prices, cap housing rents and to link increases in the minimum wage to the nation's average earnings. It has also pledged to raise tax rates for high earners and said it would consider the option of renationalising the rail industry.

In his speech, Osborne said such promises by Labour were examples of an agenda that he called "deeply pessimistic" and "anti-business".

"(The) consensus that we put the national economic interest first - ahead of opportunist party advantage - is under threat for the first time in 25 years," he said.

Labour says its policies offer a fairer strategy of reform for society however. Earlier this week, Labour leader Ed Miliband denied his party had an anti-business agenda. (Editing by Andrew Osborn and Andrew Heavens)