The SEC order followed a formal commission meeting Thursday night and a separate extraordinary meeting that Cox and other senior officials attended in the Capitol building the same evening. Senior administration officials asked Congressional leaders for additional authority to soothe turbulent capital markets.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are seeking legislation to give the U.S. government the power to buy up illiquid assets that are plaguing financial companies.

’RESTORE EQUILIBRIUM’

"The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets," Cox said in a statement. "This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress."

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 that’s being sold from an institutional investor such as a pension fund.

The U.S. short-selling ban covers 799 financial stocks, including commercial banks, insurers and the two remaining big investment banks Goldman Sachs Group and Morgan Stanley .

The SEC’s emergency order also requires institutional money managers to report new short sales of certain publicly traded securities.

Morgan Stanley shares soared 22 percent to $27.80 on Friday, while Goldman jumped 19 percent to $128.40. The S&P financial index <.GSPF> shot up 8 percent.

A widely followed exchange-traded fund that tracks the S&P 500 financial sector, the Financial Select Sector SPDR , rose 17 percent.

GLOBAL EFFORT

The U.K. Financial Services Authority imposed a four-month ban on short-selling of financial stocks on Thursday, driving financial stocks there up by as much as 40 percent. Ireland also announced a ban on short sales.

"It’s absolutely the right thing to do. These are extraordinary times, extraordinary markets, and they require exceptional measures, and I am particularly pleased it has been put in place," Keith Skeoch, Chief Executive of Standard Life Investments said of the U.K. action.

"I’m also particularly pleased that it’s temporary, and I think that the market should be allowed to settle down and short selling is part of the market and quite pleased that at some point the ban will be lifted," Skeoch said.

However short sellers and hedge funds were dismayed.

"The SEC seems to be lurching from order to order late at night. If short sellers begin publishing their positions, CEOs could look at that list, and if they don’t like it they could use shareholder money and bring frivolous lawsuits against short sellers," Jim Chanos, a well-known short seller who runs hedge fund Kynikos Associates, told CNBC television.

National market watchdogs in France, Portugal, and Ireland took similar steps, but there was no coordinated announcement in spite of exchange mergers and new pan-European trading platforms making EU-wide share trading common.

The Committee of European Securities Regulators, made up of national watchdogs from all 27 EU states, may make a statement on short selling later on Friday, regulatory sources said.

Other countries tightened up rules against "naked" short-selling, which is when investors sell the stock without owning or borrowing it, and buying it back before the trade has settled.

In Switzerland the bourse and regulators reminded investors that naked short-selling was not allowed on the Zurich-based SWX exchange. Australia slapped a ban on naked short sales, effective on Monday.

The global rally in finance shares was helped by the radical U.S. plan to mop up toxic mortgage debt as authorities continued to take drastic action to halt panic spreading across the industry.

"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.

PUSHED TO ACT

Financial companies and U.S. lawmakers had pushed the SEC to end abusive short selling after Lehman Brothers Holding was forced into bankruptcy protection earlier this week, and Merrill Lynch agreed to be bought by Bank of America .

Morgan Stanley Chief Executive John Mack lashed out at short sellers on Wednesday after watching company shares plunge as much as 42 percent and seeing prices for its debt-default insurance soar into distressed territory.

"What’s happening out there? It’s very clear to me -- we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down," Mack said in a memo obtained by Reuters.

On Wednesday, the SEC issued three rules aimed at cracking down on illegal naked shorting.

Friday’s SEC emergency action could go even further. "The Commission will continue to consider measures to address short selling concerns in other publicly traded companies," it said.

The SEC order will end at 11:59 p.m. EDT on October 2, and could be extended for 10 days. The SEC measure can only last a total of 30 calendar days. Certain bona-fide market makers are exempt from the order.

Under the emergency rule, restrictions have been eased to give companies more flexibility to repurchase their stock.

(For SEC press release, identifying the 799 financial stocks in the ban, double click: http://www.sec.gov/news/press/2008/2008-211.htm)

(Reporting by Rachelle Younglai and Karey Wutkowski in Washington, Svea Herbst-Bayliss in Boston, Paul Hoskins, Steve Slater, Cecilia Valente, Joel Dimmock, Laurence Fletcher, Lorraine Turner and Myles Neligan in London; writing by Christopher Kaufman; Editing by Lisa Von Ahn/Jeffrey Benkoe)