BEIJING (Reuters) - China released guidelines on Tuesday aimed at preventing a venture capital bubble, as the world's second-largest economy increasingly looks to fuel growth through innovation and services.

China's venture capital industry is growing rapidly but "there are some investment 'bubbles' and risks hidden in illegal fundraising which require better regulation," the cabinet said in the guidelines posted on the central government's website.

Venture capital firms should step up support for the real economy and tech start-ups, it said, encouraging such firms to make long-term investments to reduce "bubbles" in investment valuations that could fuel market risks.

The guidelines encourage institutional investors such as state-owned enterprises, insurance firms and university funds to invest in venture capital firms and funds.

Trust companies will be allowed to develop products to support the industry, as long as risks are managed.

The venture capital sector will be opened up to foreign investors in an orderly way and foreign and domestic investors will be given equal treatment, the guidelines say.

The guidelines follow similar comments this month by Premier Li Keqiang encouraging more venture capital funding and promising equal treatment for domestic and foreign venture capital investors.

(Reporting by Sue-Lin Wong and Kevin Yao; Editing by Clarence Fernandez)