Whistle-blowers are to be granted immunity from prosecution in return for evidence.

Alistair Darling, the Chancellor, is planning to hand the Financial Services Authority (FSA) — which in the past has struggled to prove illegal market intervention — plea-bargaining powers known as “specified prosecutor status” similar to those exercised by the Serious Fraud Office.

The proposed legislation, to be outlined by the Chancellor in the coming months, comes after the smash-and-grab raid on HBOS last week, in which 20 per cent of the bank's value was erased in an hour through unfounded market rumours about its financial health.

The FSA has launched a hunt for the perpetrators but analysts have said that the culprits most likely will never be identified.

Mr Darling said in an interview with The Guardian: “I can’t allow us to get into a situation where people quite deliberately manipulate markets for personal gain with the potential to destablise the financial system.”

The FSA has been pushing for a US-style plea-bargaining system for some years but discussion with the Government never produced a law.

Mr Darling said: “People are getting away with it and the time has come for us to start looking at it again.

"If a handful of people are up to no good, we have to make sure the authorities have the tools to do the job.”

The assault on market distortion comes as pressure on the Bank of England over its handling of the credit crunch increased yesterday when a respected former member of its Monetary Policy Committee criticised Mervyn King, the Governor of the Bank, for poor communication with financial markets.

DeAnne Julius, a former British Airways chief economist who made her reputation on the MPC as an arch dove, said that the Bank was moving too slowly to lower rates.

“They’re behind the curve,” she told Bloomberg Television, adding that if she were still on the MPC at its meeting next month she would vote for a half-point cut.

Dr Julius suggested yesterday that much of the blame for the run on Northern Rock last autumn should be laid at the Bank’s door.

She suggested that the Bank had not had timely intelligence on problems in the early stages and had been slow to react.

“This was first and foremost a liquidity problem, and a problem with the UK money markets, and that’s the Bank of England’s job,” Dr Julius, chairman of Chatham House, the foreign affairs think-tank, said.

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