The Financial Services Authority (FSA) has imposed new regulations to ban the practice of short-selling, which may have exacerbated the global financial crisis.

Restrictions on short-selling, a practice whereby market traders bet on share prices falling in a bid to create capital from the sale and purchase of assets, will be imposed until January 16th 2009.

It is believed that short-selling may have been at the root of the tumbling share prices of HBOS earlier this week, which led to its rescue by Lloyds TSB.

The FSA’s announcement follows restrictions placed on short-selling by the Securities and Exchange Commission, the US financial regulator.

“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” said Hector Sants, chief executive of the FSA.

“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.”

Typically employed by hedge fund managers, short-selling involves the borrowing and sale of an asset in the belief that its share price will fall.

The assets, whether shares, currency or contracts, can then re-acquired at a lower price and returned to an investor, with the trader keeping the difference.

A comprehensive review of the FSA’s rules on short-selling is to be carried out in January.