Britain's financial authorities made a rare public move to calm jittery markets today, saying they were not aware of problems at any UK bank and would investigate share price moves sparked by unfounded rumours.
Despite yesterday's 75 basis point cut in US interest rates - the latest attempt by the Federal Reserve to restore stability after the rescue of U.S. bank Bear Stearns at the weekend - London markets remained volatile.
HBOS, Britain's biggest mortgage lender, bore the brunt of the rumours, with its shares plunging 17 per cent to a record low of 398 pence at one point.
HBOS, owner of the Halifax brand, dismissed the speculation, saying it had an "exceptionally strong balance sheet" and continued to access wholesale funding. Its shares pared earlier losses and by 13.15 p.m. were trading at 462p, down 4 percent.
The Bank of England, which has come under fire for failing to react quickly enough to the near collapse of Northern Rock six months ago, took the rare step of commenting on the rumours.
"No meetings have taken place or been scheduled to discuss problems with any institution in the UK," a Bank spokesman said.
The financial services regulator, which has also faced criticism over the Northern Rock debacle, confirmed an earlier Reuters report that it would probe the latest share sell-off.
"We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them," the Financial Services Authority (FSA) said in a statement.
Authorities are concerned that speculators can benefit from wild gyrations in share price and spread false information. Investors can profit by selling shares "short" before buying them back later.
Shares in other banks Alliance & Leicester and Bradford & Bingley also both fell over 5 per cent amid talk that higher funding costs were heaping pressure on banks facing a UK economic slowdown and more losses on risky US assets. They also pared early losses.
Policymakers showed they have an increasingly watchful eye on the situation.
Bank Deputy Governor John Gieve, whose remit is financial stability, has been replaced by another of the central bank's policymakers at a speech tomorrow so he can stay in London to monitor market developments.
Governor Mervyn King and fellow Deputy Governor Rachel Lomax have also cancelled regional visits this week, as financial market fears heightened after the forced rescue of Bear Stearns.
A Bank spokesman said rumours that King or other senior executives had cancelled a trip to the Far East due to a possible problem were "complete fantasy", however.