A senior US stock market official is reported to have referred to London's Alternative Investment Market (AIM) exchange as "like a casino".
The LSE is still a potential takeover target for Nasdaq
Roel Campos, from the Securities and Exchange Commission (SEC), said he was concerned that 30% of new firms listing on AIM "are gone in a year".
"That feels like a casino to me", he was reported as saying on the sidelines of a conference in London.
Aimed at smaller firms wanting to raise cash, AIM has no minimum size demands.
The LSE retorted that a doubling of US companies on the AIM to 60 since the start of 2006 meant it was "surprising that Mr Campos should make comments that are so entirely wrong".
The comments "do a disservice to the quality small companies choosing to join AIM, the institutions choosing to invest in those companies and the high regulatory standards that the London Stock Exchange promotes," LSE director of media relations John Wallace said.
The failure rate of companies on AIM was not much different to that of the main market, running at around 3%, he said.
Many analysts believe London's lighter touch regulations, compared with the tougher Sarbanes-Oxley regime brought in on Wall Street after the Enron scandal, have diverted some company flotations to London.
Mr Campos's comments have raised concerns that the SEC will seek some sort of regulatory influence if Nasdaq was to buy the London Stock Exchange (LSE), which also owns AIM.
LSE shareholders rejected a takeover bid from Nasdaq last month although the US firm could conceivably return with a new offer later this year.
Mr Campos was also quoted as saying that the lighter level of regulation of the AIM market could taint the main London market.
"It's a losing proposition to tout lower standards as a way to promote your markets," he said.
Combined proceeds from new company listings on AIM and the LSE topped those on Nasdaq and the New York Stock Exchange for the first time last year.