The Financial Services Authority's crackdown on short-selling failed to prevent shares in HBOS slipping below the bank's rights issue price on the first day of the new regime.

After opening at 300p a share, HBOS slumped to 273.75p before closing at 282.5p. It is the second time that the stock has fallen under the 275p subscription price, raising fears that investors could shun the capital-raising.

The bank's share price had been boosted by the City watchdog's new rules to stop short-sellers from forcing down a company's shares during a capital-raising. The rules were introduced after short-sellers routed HBOS in March by using rumours that the bank needed emerging central bank funding.

The new rules came into effect yesterday but a combination of unease over HBOS's trading update on Thursday and negative notes from analysts at Citigroup and Panmure Gordon prompted investors to dump the shares regardless.

HBOS can expect further bad news next week. Other analysts said that they were downgrading their estimates for the bank's profits on the back of the trading update. One analyst said: “You really have to start to pare back your 09 numbers with a very bearish view.”

If the share price remains close to or below the subscription price, HBOS's underwriters, Dresdner Kleinwort and Morgan Stanley, will be left with much of £4billion of shares being issued. Bankers said that they had found sub-underwriters for a substantial portion of the stock.

HBOS's management is on a roadshow that is expected to intensify over the next two weeks. Sources close to the bank remained positive yesterday.

“What we've seen today is light selling on the back of a spicy note from Citi,” a source said. “The body language from investors and analysts is understanding. They're all ears.”

However, HBOS's plunging share price raised expectations that the FSA would invoke even stricter rules on short selling, as it comes under pressure from the Government to ensure that the bank's capital-raising goes smoothly.

The regulator has already mooted the possibility of preventing investors from lending the shares of companies undertaking rights issues, or stopping short-sellers from trading in nil-paid rights. Both suggestions provoked furious responses in the market.

The confusion caused by the rules was apparent yesterday, when an American hedge fund revealed its short position on Bradford & Bingley (B&B), before issuing a second announcement correcting the format of its information to suit the FSA's requirements. JGD Management Corporation is shorting 0.49 per cent of B&B's stock.

In the trading update to accompany its prospectus, HBOS said that it expected house prices to fall 9 per cent this year - worse than its previous predictions - and unveiled increased mortgage arrears on the buy-to-let and self-certified mortgages that make up 26 per cent of its £250 billion mortgage book. It also announced writedowns on its private equity investments in the troubled housebuilding sector.

Yesterday the bank, which through Halifax, its subsidiary, is Britain's biggest mortgage lender, announced a fresh round of rate rises that will affect all borrowers, no matter how much equity they have in their property. Halifax and Intelligent Finance, HBOS's internet lender, will raise rates today by up to 0.6 percentage points on its tracker and fixed-rate home loans.

Even borrowers that own at least 25per cent of their home's equity, who had previously been shielded, will be hit by a 0.5 point rise on a two-year fixed rate, from 6.49 to 6.99 per cent at Halifax. On a £150,000 mortgage, the difference would add £47 a month to repayments.

The move, which takes the total number of rate changes on a two-year fixed rate by Halifax to 20 since January, came as other leading lenders suddenly raised their rates. C&G increased rates by 0.3 point and Clydesdale and Yorkshire Building Societies will increase their rates by 0.3 point on Monday.

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