London mayor Boris Johnson has said it would be wrong to "slam the door" on wealthy foreigners buying property in the capital.
Chancellor George Osborne is to impose a so-called "oligarch tax" on sales of homes by non-UK residents in a bid to cool the city's overheated housing market.
A sharp increase in overseas purchases, especially by rich investors such as Russian oligarchs, has been blamed in part for spiralling prices.
Mr Johnson said it would be "utterly nuts" to pursue any policy which deterred vital foreign investment.
In a speech to the annual Mansion House London Government Dinner he said he recognised there was a "desperate shortage of homes" in the capital - with up to 47,000 now needing to be built a year just to meet demand.
New builds should be "marketed first to Londoners", he suggested, and foreign owners should either live in or rent out their properties not just regard them as "blocks of bullion in the sky".
"But what I don't want to do is to follow the logic that I read from time to time and that is to slam the door again on the right of overseas residents to buy homes in London, notwithstanding the effect they may have in some parts of prime London on the market," he said.
"I don't think that is the right approach."
He did not refer directly to the tax policy, but added: "I do not in any way want to deter international investment in our city. Quite the reverse: I want to encourage it.
"You can see astonishing transformations taking place in London thanks to international investment.
"We would be utterly nuts as a society if we did anything to turn that away."
Mr Osborne confirmed in his Autumn Statement that non-UK residents would have to pay capital gains tax (CGT) on property sales from April 2015.
The mayor said it was not right to blame immigrants for the problems caused by a rapid influx to the UK over recent years even though it " has unquestionably been tough on many people on low incomes here in London and in our country".
"It is a problem we have to manage but the answer is not to blame immigrants. Nor is the answer to slam the door on people of talent," he said.
"The answer is to grip the illegal immigration that's been going on, ran out of control, make sure that the benefits system is not working in a perverse way but above all to help our folks, help our Londoners, to help people growing up in this city to get the jobs that they need."
He did risk a diplomatic spat, however, with a joke at the expense of Germany.
Noting that the capital was now home to so many French ex-pats that it was effectively t he fourth biggest French city, he quipped: "Any bigger, my friends, and we will have to worry about the possibility of a German invasion.
"For the benefit of all international diplomats here tonight, that's a joke. Don't panic," he added hastily.
Mr Johnson also took a fresh pot shot at Lib Dem Business Secretary Vince Cable - a London MP - who warned recently that London was " becoming a giant suction machine draining the life out of the rest of the country".
"I hope they take Vince down Crossrail. Not to entomb him there of course - perish the thought - but so he can see a project that will grow the UK economy by £63 billion, that is creating three fifths of its contracts outside London that is helping tens of thousands of people into jobs across the country," the mayor said.
One of those was a cable company "so old that they probably made Vince Cable himself", he added.
Beleaguered French president Francois Hollande also came in for a ribbing, with Mr Johnson - who has himself had to deal with personal scandals being exposed - telling him: "If things get too tough for you over there, just put on your famous crash helmet, get on your scooter and join the exodus to London where you will find, amongst other attractions, a civilised and gentle media who would never dream of being so vulgar as to discuss your personal affairs."