The City watchdog threatened yesterday to step up criminal prosecutions and to increase fines for market abuse after more than a quarter of last year's takeovers showed signs of insider trading.

The Financial Services Authority (FSA) found that informed price movements (IPMs) took place in about 28 per cent of mergers and acquisitions in the FTSE 350 last year, slightly ahead of 2006.

There were IPMs in about 23 per cent of cases in 2005.

Sally Dewar, the managing director of wholesale and institutional markets for the regulator, described trading on inside information as “cheating”.

She said: “The vast majority of trades [are] perfectly legitimate. However, a small but significant minority are abusive.”

IPMs - stock price changes in the two days before regulatory announcements - are used by the FSA to measure market cleanliness.

An IPM indicates that a share price's movement was abnormal compared with how the price behaved in a non-announcement period.

The FSA obtains records of IPMs from Sabre II, its transaction-monitoring system.

Addressing the findings in a Market Watch newsletter, the regulator said: “The level of IPMs for takeovers is too high and is not reducing as we would wish.”

As well as pursuing civil cases against insider traders, the FSA said that it would push harder for criminal prosecutions. It said: “We have also made it clear that we will be imposing increased financial penalties in cases we pursue through the civil route.”

This year Christopher McQuoid and James William Melbourne appeared in court charged with insider trading after an FSA investigation. Their trial will not be heard until February at Southwark Crown Court.

The FSA acknowledged that the lead times to criminal hearings meant that administering punishment would take longer than in the past, so having actions running continuously was key.

The regulator said: “We need to establish a steady stream of cases - both criminal and civil - and we believe we are well on our way to delivering that.”

From March, all companies will have to record telephone conversations and electronic communications related to client orders and equity, bond and derivatives trans-actions.

The FSA, which has the power to grant immunity to witnesses, has started to conduct telephone interviews with traders after IPMs.

However, the regulator noted that IPMs did not necessarily indicate insider trading.

Data circulated by analysts or the media, leaks by companies and traders acting on the back of activities by other traders with insider knowledge could also result in IPMs, the FSA said.

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