The Financial Services Authority (FSA), the City watchdog, has launched an investigation into potential market abuse after shares in HBOS plunged to a 10-year low on speculation the bank is facing liquidity problems.

It is understood that Bank of England has been in touch with the FSA about investigating the source of speculation that the Central Bank was set to hold an emergency meeting with a UK bank, rumoured to be HBOS.

There are concerns that speculation has been generated by "short-sellers" who make money by betting on shares that fall in value.

The FSA said today: "There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling.

"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 market regulator added: "We remind market participants of the need to take extra care, in this market climate, to adhere to the market code of conduct."

A spokeswoman at the Bank of England said: "No meetings have taken place or been scheduled to take place."

A meeting is set to take place next week between the Bank of England and Britain's "leading banks", but it is understood that the meeting, organised last week, is a "general catch-up" and not an emergency discussion about banks' funding.

Shares in HBOS tumbled as much as 18 per cent and were down 10.4 per cent, or 50p, to 430p at midday, as rumours heightened over the strength of its capital after the bank last week raised £750 million at a sky-high interest rate of nearly 9.5 per cent.

Speculation over HBOS' stability was stoked by the bank's decision to raise the sum through a bond issue, designed to maintain the bank's Tier 1 capital at 7.7 per cent.

Tier 1 capital is the core measure of a bank's financial strength, made up of capital deemed to be the most reliable and liquid.

A spokesman at HBOS said: “We have ready access to a deep pool of retail deposits.

“We are one of the most respected names in the wholesale capital markets and we are continuing to access wholesale funding whenever appropriate.”

Some observers have dismissed the suggestion that the bond issue is a sign that the bank's liquidity is drying up.

One analyst said: "HBOS did a capital raising last week - this required investment banks and auditors to carry out due diligence - all signed off. There is absolutely no change in their ability to fund."

However, there are concerns among British banks about funding after the Bank of England was deluged by requests to borrow money in a £5 billion auction at the beginning of the week. Despite only £5 billion being on offer, banks sought to borrow a total £23.6 billion.

Today, the Bank of England also denied rumours that the Bank of England's nine-member Monetary Policy Committee had been asked not to take leave over Easter in case a crisis breaks in the financial market.

A spokeswoman described the speculation as "pure fantasy".

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