The City watchdog opened a review yesterday of how investors deal with rumours rocking financial markets, after admitting that it had failed to find the culprits who destabilised HBOS's share price with false speculation in March.

The Financial Services Authority (FSA) had launched an investigation on March 19 after shares in Britain's biggest mortgage lender fell by 17 per cent within an hour.

Short-sellers were blamed for spreading rumours - that HBOS had sought an emergency loan from the Bank of England and that Mervyn King, the Bank's Governor, had abandoned Easter travel plans to deal with the problem - in order to force the bank's shares down.

Short-sellers profit from falling share prices because they borrow shares and immediately sell them, in the hope of buying them back more cheaply at a later date and returning them to the lender, pocketing the difference.

HBOS, the Bank of England and the FSA made public statements during March 19 to assure the market that the bank had not been bailed out and trading in the stock was halted once at 8.43am in an attempt to stem the fall.

Despite this, after dropping as low as 398p, HBOS's share price closed down more than 7 per cent at 446p.

The regulator said yesterday that, despite more than four months of searching, it had found no evidence of deliberate rumour-mongering by short-sellers.

“There's no doubt that false and damaging rumours were circulating about HBOS on March 19, 2008, and these would have had some impact on HBOS's share price,” the regulator said.

“It is difficult, however, to say how much impact, as the share price was also affected by the interaction of a number of other complex factors on the day.”

These factors included a lack of liquidity in the bank's stock and the effect of so-called black-box trading strategies that amplified the impact of the initial falls in the share price.

The FSA said, however, that it was following up wider issues that the HBOS investigation had uncovered, including a review of the systems and controls at companies for dealing with rumours.

“We are examining what policies are in place and how firms ensure compliance with them; whether and how rumours are verified; whether traders are permitted to pass on or trade on rumours; and how firms ensure staff do not either initiate or spread false rumours,” the regulator said.

The FSA will talk to investment banks, securities firms and hedge fund managers before revealing its findings in the early autumn.

It is part of a crackdown by the FSA's enforcement team, which is also concentrating on punishing more market participants for insider trading. This week eight people were arrested on suspicion of being part of a ring that was acting on insider knowledge.

Bankers were sceptical about the prospect of a review into rumour-mongering.

One said: “The rumours about HBOS told the market far more about issues surrounding liquidity at the bank than its management or its regulator did.”