* Position limits not always effective against "herding"
* Intervention similar to Central Banks on currencies-author
* Report follows mysterious $4 plunge in oil futures
By Emma Farge
GENEVA, Sept 18 (Reuters) - Governments should let regulators step into commodity markets to pop price bubbles, prevent crashes and combat powerful financial investors, a U.N. report showed on Tuesday, a day after a sudden oil price plunge baffled traders.
Financial players such as hedge funds and high-frequency traders are to blame for increased volatility in commodity prices and urgent action should be taken to increase transparency and boost regulators' powers, the paper said.
The report, 'Don't Blame the Physical Markets', said that direct intervention on exchanges might be required as a last resort if other measures prove ineffective in tempering commodity price swings.
"Market surveillance authorities could be mandated to intervene directly in exchange trading on an occasional basis by buying or selling derivatives contracts with a view to averting price collapses or deflating price bubbles," the paper, published by the United Nations Conference on Trade and Development (UNCTAD) said.
The list of recommendations, which may be difficult to convert into policy, come as governments face growing pressure to take action on high energy and food prices.
The United States has already approved new rules known as Dodd-Frank that will impose position limits on many commodities. The European Union is also moving in that direction but they both stop short of official intervention to dampen prices.
David Bicchetti, associate economic officer at UNCTAD and one of the report's authors, said new powers to intervene would be comparable to the role of a Central Bank which can enter a market to buy or sell a currency to cap its value.
"The idea would be for a central bank or a regulator to intervene like with a currency market," he said.
In some cases trade caps like those under consideration by lawmakers in Brussels, would not always be enough to prevent a sharp rise or drop in prices, he added. For example many small traders can form a "herd" by all buying or selling at the same time, with a dramatic impact on prices.
The report also proposed a "transactions tax system" designed to reduce the number of trades executed by high frequency traders.
Since around 2000 an increasing number of financial players such as hedge funds have entered the commodities markets, perceived to be entering a super-cycle which some analysts now see as waning.
Higher traded volumes have in turn drawn in high frequency traders which many blame for volatility, such as the rapid $4 plunge in oil futures on Monday or the unprecedented $12 a barrel drop in May 2011.
France has called an emergency meeting of G20 farm ministers for mid-October to discuss curbing price swings on grain markets.
The report cites data from the Institute of International Finance that commodity assets under management rose to a record high of $450 billion in April 2011 from less than $10 billion around the end of the last century.
"Once we re-regulate markets we will come back to a situation where consumers and producers dominate price discovery and we will be a lot closer to fundamentals," said Bicchetti.
UNCTAD has a mandate to further the trade and investment interests of developing countries which are often heavily reliant on commodity exports and therefore vulnerable to price swings.
Commodity traders have long maintained that there is no need for intervention, saying prices are largely determined by supply and demand factors with little hard evidence to the contrary.
One oil trader with a European bank expressed scepticism about any plan that would authorise direct intervention in on futures exchanges such as the IntercontinentalExchange or the Chicago Board of Trade.
"Once you start directly interfering in a market it becomes inefficient. Either you believe in markets or you don't," he said.