"We had a view...that there was abusive behaviour taking place. I am confident that the actions we took led to an abatement in that behaviour," he told reporters after the regulator’s annual general meeting.

"I believe the action was wholly justified and the subsequent market developments demonstrate that."

Both HBOS and B&B had shares trading below the rights issue price when the cash calls went ahead but succeeded in raising funds thanks to underwriting and sub-underwriting agreements.

The FSA is currently reviewing the short-selling rules as part of a broader appraisal of rights issues due to be completed later this year, together with the government.

Short sellers, often hedge funds, sell borrowed shares in the market in the hope of buying them back more cheaply at a later date. During a rights period, trading is more volatile and losses accelerate if shares fall below the issue price.

Though a legitimate strategy, short selling has come in for criticism in the past months. U.S. regulators came under pressure to introduce rules after the demise of investment bank Bear Stearns in March and have since limited certain types of short selling in major banks and financial firms.

"BRAVER" ACTIONS

Sants, which said the FSA had increased its vigilance in the "rather more rumour-prone environment" of recent months, warned firms that the FSA would not shy away from more "brave" but also directive actions, less familiar to the principles-led regulator, even in the face of criticism.

He also told firms to expect higher fees in the coming regulatory year as it boosts key areas of supervision.

"Firms are likely to see an increase in fees, potentially a significant increase in fees. We will do our best to mitigate that wherever possible," Sants said.

The FSA has long said that financial conditions are likely to remain strained for some time, warning banks and institutions to test their business models for even worse conditions.

Sants said on Thursday that the coming 12 months would be "very difficult" as the credit crunch moves beyond the liquidity and solvency crises of the past months into a third phase, affecting the real economy and consumers.

(Reporting by Clara Ferreira-Marques; Editing by Erica Billingham)