If it became law, the directive would make the system for letting PFI contracts unlawful. This would then have a radical effect on capital investment in public services.
The European commission is concerned that the PFI breaches the principles of fair competition.
The worry is that it permits negotiations between contractor and client once the contractor has been named preferred bidder, and is therefore in a stronger bargaining position than other bidders.
Under the proposed legislation, due to be decided by ministers in January, negotiations after preferred bidder stage would be restricted.
The Construction Confederation has held urgent talks with the government over the issue in the past two weeks. As things stand, if the directive was passed any PFI deal would be open to legal challenge because it would infringe the European regulation.
This issue is a potentially serious problem
Stephen Ratcliffe, chief executive of Construction Confederation
Confederation chief executive Stephen Ratcliffe has called on the Treasury to persuade European leaders to accept a compromise wording of the directive that has been proposed in the European parliament.
Ratcliffe said: "This is a potentially serious problem. Contractors are looking for specific wording within the European directive that makes it explicit they can enter into exclusive dialogue with clients after the preferred bidder stage."
The confederation has asked a top QC to examine the legal implications if the directive is brought in. It has asked the government to provide legal guidance.
It is understood that DTI minister Jacqui Smith has written to the Confederation about its concerns.
A chief executive at one leading PFI bidder added that there was serious concern over the introduction of the ruling.
He said: "Contractors are looking for certainty in contracts. PFI bidding costs a lot already. If this directive causes more worry and uncertainty then it puts incredible strain on the whole PFI process."
Contractors also face accounting problems. They will be required to include bidding costs on the profit and loss balance sheet up to the preferred bidder stage. After that, the costs, which can be 5-10% of the capital sum, can be capitalised.