"The big armoury is really aimed at it (the financial crisis). There’s been massive liquidity injections and now restrictions on the free market economy," said Simon Maughan, analyst at MG Global.

Short-selling involves an investor selling stock in anticipation the price will fall -- in which case the investor can buy the stock back at a lower price. Such a strategy is usually coupled with borrowing the stock being sold from an institutional investor such as a pension fund.

Although drastic, the latest regulator moves are aimed at preventing short sellers targeting a troubled bank and potentially driving it to collapse. Speculators have been criticised for targeting banks including Lehman Brothers and HBOS .

FOUR-MONTH BAN

Shares in Britain’s Royal Bank of Scotland , Barclays , Lloyds TSB and HBOS all jumped by over 30 percent after the UK Financial Services Authority (FSA) imposed a four-month ban on short-selling financial stocks.

The Irish Stock Exchange also moved to block short-selling, helping send Anglo Irish Bank up more than 100 percent in early trade. The stock was up over 30 percent by midsession.

Elsewhere Australian regulators slapped a ban on "naked" short-selling, which is when investors sell the stock without owning or borrowing it, and buying it back before the trade has settled -- a controversial practice even before the latest financial market turmoil.

In Switzerland the bourse and regulators reminded investors that naked short-selling was not allowed on the Zurich-based SWX exchange. Swiss bank UBS rallied 30 percent and Credit Suisse rose 23 percent.

Austrian watchdog FMA said it is in talks with market participants about whether restrictions such as a ban on forms of short-selling were necessary, while in Portugal regulator CMVM said it was considering "extraordinary" measures on short-selling with european counterparts.

Hedge funds were angered by the restrictions, saying short selling was being blamed when there were a raft of fundamental problems facing banks around the world.

"If they think that’s going to solve the problem, the horse has bolted," said the chief executive of one UK-based hedge fund manager.

"There’s not been that much borrowing in HBOS -- hedge funds have not been that involved. Sometimes share prices fall because people genuinely sell shares ... The idea that it’s just the hedge funds is an absurdity," said the CEO who asked not to be named.

Data on the amount of stock out on loan, a good indication of how much a stock has been sold short, appeared to back him up. A modest 2.8 percent of HBOS’s stock was out on loan earlier this week, while the figure was 5 percent for Barclays but just 1.4 percent for RBS, according to research firm Data Explorers.

Institutional investors which lend out stock also joined in the clampdown.

Britain’s largest pension fund, the 39.7 billion pound BT Pension Scheme, said it had banned stock lending for 20 British and global financial companies.

APG, the 230 billion euro (181.3 billion pound) Dutch pension scheme, said it had stopped lending securities of European and U.S. banks facing "downward pressure" on their stock prices.

(Additional reporting by Cecilia Valente, Joel Dimmock, Laurence Fletcher, Lorraine Turner and Myles Neligan; Editing by Sue Thomas and David Holmes)