LONDON (Reuters) - British finance minister Alistair Darling watered down earlier proposals to reform capital gains tax yesterday, almost halving the rate for people selling business assets up to £1 million.

The move to introduce an "entrepreneurs' relief" rate of 10 percent followed ferocious lobbying by business groups and was portrayed as a humiliating U-turn by opposition politicians.

Conservative treasury spokesman George Osborne said Mr. Darling was retreating on "his one big idea" and described the episode as "a textbook example of how not to write tax law in this country."

Mr. Darling announced plans in October to cut the main rate of capital gains tax to 18 percent from 40 percent. But at the same time he scrapped taper relief which allowed a sliding scale of charges to as low as 10 percent depending on how long business assets were held.

The additional changes announced yesterday would cost in the region of £200 million per year and would benefit about 80,000 business owners and investors, Mr. Darling said.

Business groups gave a lukewarm response to the changes.

"The reality is that these revised measures will do nothing to help the real business powerhouses of this country," said Richard Lambert, director general of the Confederation of British Industry.

"Although £1 million might sound a lot, it could have been built up over 20 or 30 years."

David Frost, director general of the British Chambers of Commerce, said the changes would be a great relief for many small business owners, but criticised the government's attempt to raise taxes on businesses just as the economy was slowing.

"The government should not have changed a capital gains tax system that was working well and helped to foster an entrepreneurial spirit," he said.

The Association of British Insurers (ABI) welcomed Mr. Darling's willingness to treat the life insurance industry as a special case.

"The Treasury has today accepted that the announcement on capital gains tax created specific and adverse problems for savers and the savings industry," said an ABI spokesman.

"It is vital that the government now commits itself to resolving these as soon as possible."

The capital gains tax reforms will take effect from April 6.