The Financial Services Authority, the UK stock market watchdog, has proposed closer scrutiny of traders who bet on share price falls.

These so-called short-sellers sell shares they do not own in the hope of buying them back at a cheaper price later on.

The move comes amid mounting concern that the practice has contributed to recent sharp declines on the London stock market, where the benchmark FTSE 100 index has lost a quarter of its value since the beginning of the year.

But the FSA has stopped short of either banning the practice or taxing it, measures some critics had called for.

Its proposals will be published in October.

Gambling on price

Short sellers borrow stocks from major pension funds in return for a fee, and sell them in the expectation that the price is about to fall.

If this prediction proves correct, the short-seller buys the shares back at the lower price and returns them to their owner, pocketing the difference.

Some analysts say short-selling aggravates share price falls, and reduces returns for long-term investors.

Short-selling is usually carried out by hedge funds - investment firms which seek to maximise returns through risky trading strategies that mainstream pension funds are legally barred from using.

Transparent trading

The FSA ruled out an outright ban on the practice.

Instead its draft proposals will be aimed at encouraging short sellers to provide more information on their activities.

"Markets rarely suffer from regulation that improves the flow of information," said FSA chairman Howard Davies.

The move would bring London more closely into line with New York, where the stock exchange publishes regular updates on short-selling volumes.

But the FSA said it would not be adopting a US-style 'uptick' rule, which bans short trades unless the last movement in the stock price was upwards.

Criticism mounts

The FSA's proposals are unlikely to satisfy the more outspoken critics of short-selling.

David Prosser, chief executive of pensions firm Legal & General, has called for short trades to be taxed.

Legal & General stopped lending shares to short-sellers in the week after the 11 September attacks, when stock markets worldwide plunged.

More recently, David Varney, head of mobile telephone firm mmO2, described existing checks on short-selling in London as "woeful."

Stock exchange trading statistics suggest that mmO2, which has lost nearly half its market value so far this year, has frequently been targeted by short-sellers.