Britain's Financial Services Authority (FSA) said yesterday that shorting financial stocks has now been outlawed, in a bid to improve market stability.
The takeover of HBOS by rival mortgage lender Lloyds TSB in a $24 billion deal earlier this week is thought to have provided the impetus for the ban.
HBOS stock was reportedly aggressively shorted as market confidence in the firm declined, even dropping 50 per cent on the morning of the deal being announced.
The US Securities and Exchange Commission is also said to be considering a similar move, in order to protect its own financial sector.
Shorters are also thought to have helped cause the collapse of Lehman Brothers last weekend.
FSA chairman Callum McCarthy said: "There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions.
"This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect - something which the equity markets for financial firms badly need."