The British government has a temporary exemption from the EU's "droit de suite" levy on the re-sale price of works of art payable to the artist or the artist's inheritors for 70 years after his or her death.
Extending the artists' resale right beyond living artists to those who have died in the last 70 years would increase the number of sales liable to the levy by four times, according to estimates from the British Art Market Federation.
Considering nearly 40 percent of the 7.7 billion pound annual British art market is accounted for by modern and contemporary art, the levy would "irreparably damage" the sector, the federation added.
"Art dealers and auctioneers in Switzerland, New York and Hong Kong must be rubbing their hands with glee at the prospect of the London art market having one hand tied behind its back after January 2012," said federation chairman Anthony Browne.
Britain is second only to the United States in the international art market, accounting for 29 percent of global sales. Last year the sector generated 7.7 billion pounds ($11.50 billion) and 911 million pounds in tax revenues.
The United States is the world's biggest art market, but of particular concern to British dealers is the rapid growth of the art market in China, which could take much of the business lost to London should the levy be imposed.
"The strength of global competition is demonstrated by the rapid rise of China, which has come from nowhere to be the third largest art market with a 14 percent global share within a decade," the federation said.
It added that the EU had so far failed to enter into negotiations on how to amend the levy globally, thereby creating equal conditions for all.
Jussi Pylkkanen, president of the European arm of Christie's, the world's biggest auction house, said it would be harder to assemble major sales of modern and contemporary art in London should the levy come into force.
"This could well damage the UK's position as a global art center, with predictable effects on revenues and employment here in the UK," he said in a statement.
The world record for works of art sold at auction has been broken twice this year, both times by artists who have died within the last 70 years.
Alberto Giacometti's bronze statue "Walking Man I" sold for $104.3 million in London at Sotheby's in February, while Picasso's "Nude, Green Leaves and Bust" fetched $106.5 million at Christie's in May, although that was in New York.
