The government has banned the short-selling of banking shares to protect new super bank Lloyds-HBOS.
The Financial Services Authority acted to protect the merger from falling victim to the practice, which drives down individual share prices.
“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly market,” said chief executive Hector Sants.
“As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”
The FSA also declared it wants to see daily disclosure of all short positions in excess of 0.25 per cent, from 23 September onwards.
The collapse of HBOS sent shockwaves across the City and other offices in London.
Banks are finding capital difficult to secure and, as a consequence lenders are also struggling to borrow cash.